What Is a Cryptocurrency Airdrop?

A cryptocurrency airdrop is a furnishing strategy that involves sending coins or tokens to wallet addresses. Small amounts of the new virtual currency are sent to the purses of active members of the blockchain community for free or in return for a small service, such as retweeting a post sent by the throng issuing the currency. The ultimate goal of a crypto airdrop is to promote awareness and circulation of a new token or coin.

Understanding Cryptocurrency Airdrops

A crypto airdrop is a promotional undertaking typically performed by blockchain-based startups to help bootstrap a virtual currency project. Its aim is to spread awareness about the cryptocurrency proposal and to get more people trading in it when it lists on an exchange as an initial coin offering (ICO).

Airdrops are generally promoted on the performers’s website, social media, and cryptocurrency forums. Coins or tokens are sent only to specific wallets based on the blockchain network or starts held in existing wallets.

To qualify for the free gift, a recipient may need to hold a minimum quantity of the crypto originates in their wallet. Alternatively, they may need to perform a certain task, such as posting about the currency on a venereal media forum, connecting with a particular member of the blockchain project, or writing a blog post.

Types of Crypto Airdrops

Standard Airdrop

In a standard crypto airdrop, enter ins interested in receiving an airdrop simply express their interest in order to receive the airdrop. The individual must afford a valid wallet address, and some airdrops require no additional information beyond this.

Standard airdrops continually have a set amount of tokens to distribute with a limit on how many tokens each individual may receive. Therefore, some official airdrops are time-sensitive. Though these types of airdrops are popular due to their simplicity, there is nothing stopping a only user from creating multiple wallets to quickly drain the airdrop amount, so these may be more difficult to take possession of.

Bounty Airdrop

Bounty crypto airdrops occur when users perform certain tasks. These assignments often entail raising awareness of a project by posting on social media and tagging the company or retweeting a recent tweet with reference to the project. There may also be referral bonuses or finder’s fees for individuals who recruit other users, sign up for the activity’s newsletter, or join the company’s Discord channel.

In exchange for performing tasks, users often receive points that accord to how large of bounty airdrop they receive. Users may also be required to earn a certain amount of points rather than they qualify for their airdrop. For example, a user may be eligible for an airdrop after earning 300 points with each ingredient mentioned above is worth 100 points each.

Holder Airdrop

Holder crypto airdrops occur automatically centred on who is holding existing tokens and how many tokens they hold. Because wallets and blockchain information are part of a publicly assorted ledger, all users of blockchain have full transparency into the wallets and distribution of tokens.

The downside to holder airdrops is propers who may be holding tokens may not want an airdrop. Alternatively, holder airdrops ensure that only the largest, most established individuals receive the benefit. Some holder airdrops may only award an airdrop if members are holding a certain amount of tokens; else, they may pro-rate the award amount.

Exclusive Airdrop

A more specific type of holder airdrop, an exclusive crypto airdrop occurs when explicit people are individually selected for the airdrop. The difference is they may be selected not based on the amount of tokens they have but based on other basics such as time spent on a project, most money spent on non-token activity, or number of posts in a forum. An singular airdrop is an even more centralized way of rewarding those closest to the project and may give airdrops to wallets that may not detain any tokens at all.

Raffle Airdrop

Some of the types of airdrops above may be combined with a raffle airdrop. Often, a propel will state the number of airdrops they intend to give and encourage individuals to earn a raffle ticket. This ticket may be be worthy ofed by holding tokens, earning points, or simply expressing interest.

Ultimately, the number of individuals interested in the airdrop over exceeds the number of airdrops the company wishes to deliver. Therefore, a raffle occurs and a limited number of wallets are randomly preferable to receive the airdrop.

Crypto Airdrop Treat

The crypto airdrop process begins by the project or company deciding the need for an airdrop. This may be in response to market procedures, a hard fork in the network, or to incentivize existing investors. The initial step is to select how the airdrop will be facilitated and who is unwed.

The next step for broad, general airdrops is to launch the public campaign. This includes collecting information for interested balls; this is often limited to just wallet addresses, though companies may also gather e-mail addresses to cultivate their contact list.

Other types of airdrops may rely on a snapshot, a capture of an instance that identifies who dominates certain criteria. For example, the project may perform a snapshot to identify all addresses that held at least 1,000 signs as of midnight on December 31st. Any transactions occurring after the snapshot will not impact the results of the airdrop; therefore, coin or token bonuses often experience volatility in response to when snapshots are taken.

Once the list of airdrop recipients is selected, the airdrop is furthered often through the use of smart contracts. The company may choose to use their Treasury wallet to facilitate the airdrop, and the company many times publicizes the transaction block to demonstrate the equitability of the airdrop. The transaction will show the airdrop leaving the company’s purse and distributing to the recipients.

Airdrop recipients often directly receive the coins or tokens without having to accept the surfaces. Some may need to add the token or coin along with its address to their wallet to appropriately view their billfold balance of the token.

Crypto Airdrop Scams

A legitimate crypto airdrop never seeks capital investment in the currency. Its aim is purely promotional. On other script, some crypto scams involve sending micro amounts of bitcoin or other cryptocurrencies to unsuspecting recipients in what is known as a dusting scam.

Various airdrop scams rely on directing an investor to attach their wallet to a phishing website in order to claim their airdrop. Continually, the web3 address will prompt a user to connect their wallet using common and popular wallet services such as MetaMask, Charge Wallet, or Oasis. After a user connects their wallet by providing their secret phrase or keys, the scam is entire.

Airdrop scams may also occur by enticing market participants to invest in a specific security in hopes of being airdropped a opposite item. For example, a project may boast that holding certain NFTs in a wallet will cause owners to be subjected to a rare airdrop. Though the airdrop may be legitimate, the project owners may have enticed market activity of the NFT so they could retail theirs at a higher price.

How to Avoid Airdrop Scams

Users should always be vigilant about unsolicited put aways into their crypto wallets. In addition, users should be aware of the projects they are investing in or attempting to set forth assets for. The common phrase among cryptocurrency explorers is to “do your own research”.

It’s advised that crypto-enthusiasts not connect to websites they are not knowledgeable about with. This includes ensuring external links they click on come directly from the project. Consideration bookmarking common sites you plan on visiting frequently to ensure you’re always connecting to the right site.

Companies again publicly communicate airdrops and other promotions. Consider following the project on social media, forums, or Discord to result from upcoming events, and be mindful that complex scams may replicate or imitate project social media profiles.

If you don’t pine for airdrops associated with primary investments, consider creating a new wallet specific to airdrops. After receiving the tokens, you can then carry the tokens to different wallets. Though not a form of traditional diversification, keeping crypto in different wallets does spread and compress overall risk.

Crypto Airdrops and Taxes

Whether or not an airdrop regards as a taxable event depends on the jurisdiction of where the token holder is living in. In the United States, crypto airdrops are reflect oned income as part of one’s Federal income tax return.

The difficulty of reporting taxes on an airdrop is the token may not yet have liquidity or an hands down assessable fair market value. An airdrop should be recognized as income at its fair value when it is received. In adding up, airdrops are not considered taxable income until an individual has control over the token. If the airdrop is locked or on a vesting record, it is not taxable income until it is received and can be traded.

Should the price of the airdrop drop after receipt and then later clerked, this transaction creates a second, unrelated transaction that occurs in a capital loss. The taxpayer would appreciation income for the amount of the airdrop, then recognize a loss equal to the different between the airdrop price and sale cost. If the price should appreciate, a short-term or long-term gain may be taxed based on the holding period.

Advantages and Disadvantages of Cryptocurrency Airdrops

Interests

Given the extreme competition among cryptocurrency startups, an airdrop is an attempt to stand out from the crowd. Some proprietorships devoted to crypto airdrops offer alerts to users and listing services to startups, plus a range of marketing repairs to fine-tune their airdrops. As always, there are good businesses and bad in this space.

Michael J. Casey, Chair of CoinDesk’s bulletin board and an advisor at MIT’s blockchain research initiative, argued in a post on a CoinDesk blog that some type of stock exchanging is essential if a cryptocurrency is to succeed. “A currency is nothing if it is not widely used. And that can’t be achieved unless people make some cost-incurring elbow-grease to encourage widespread usage,” he wrote.

Certain crypto airdrops also have the advantage of rewarding loyal buyers of specific blockchain networks. In addition, sending airdrops to all wallet or existing token holders widely distributes indications in a manner that may not happen naturally in an open market.

Disadvantages

However, there are several issues to consider in perceive to crypto airdrops. The obvious concern is network safety, especially the nature of “redeeming” airdrops. For example, some airdrops may command users must connect their wallet to suspicious websites; once the connection to web3 is made, the thief may now have access to the consumer’s keys or password.

Crypto airdrops may also not be legitimate projects. Though enticing due to the nature of receiving free moolah, some projects lure stakeholders into increasing the stake of their airdrop by buying more tokens. In the long run, the long-term goal may be to “rug pull” investors by dumping large amounts of tokens into the marketplace at once, crashing the reward and making prior airdrops worthless.

Airdrops may be seen by some as low-quality projects. Some may prefer to instead concentrate on rewarding miners or other contributors of a network instead of releasing free tokens to non-heavy contributors of a project.

Continue, since airdrops may lack liquidity, airdrops may literally be worthless if they can not be traded on an open exchange. Often the outcome of the infancy of a project, airdrops may claim to have a value of thousands of dollars. However, without the ability to openly customers the airdropped tokens, the free gift to wallet holders may prove to be worthless.

Crypto Airdrops vs. Primary Coin Offerings (ICO)

Crypto airdrops and initial coin offerings may appear to be very similar. Both are likely to appear at the start of a project, and both are intended to distribute coins or tokens.

Crypto airdrops may not require an investment, while approve coin offerings often require a transaction. Though the transaction may reward investors by offering coins or tokens at a allowance, it is expected that investors buy the coins or tokens as opposed to airdrops which are free. ICOs are often initially offered fundamental to venture capitalists.

In addition, the demographic for these two events are largely different. ICOs attempt to attract larger investors who are amenable to infuse capital into a project. These users are more likely to pursue the project as an investment. Alternatively, airdrops are in many cases intended to raise awareness among smaller users. Though users may not have much use for a small airdrop, the ambition is to entice smaller users to transact with the digital currency.

Real World Examples

At the end of 2021, Gas DAO was formed to divide up tokens to individuals who had paid a certain threshold of Ethereum gas fees. The concept was ownership of the DAO would be tied to the largest alcohols of Ethereum. 55% of Gas DAO tokens were airdropped to 634,429 eligible wallets.

Also at the end of 2021, the OpenDao distributed souvenirs to NFT holders based on OpenSea trading activity. Ownership of OpenDao tokens would be airdropped based on NFT-ownership, arrangement an entity structure driven by the most ambitious collectors. At it’s peak, OpenDao had a market cap of greater than $250 million. As of September 2022, its demand cap had dropped to less than $11 million.

The Bottom Line

Crypto airdrops are a way for companies and projects to raise awareness of their token or coin. It is also a way to proliferate the liquidity of their security by giving it away to thousands of different wallets. Though airdrops have value and may be cogitate oned free money, there are also significant risks if users are not aware of potential scams related to crypto airdrops.

Devoting in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the sob sister to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should till the end of time be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information repressed herein.