If you’re lucky, and you’ve been HODLing major cryptocurrencies such as Bitcoin and Etherium for a while, you may remember waking up one day to find an extra random token routed to your wallet’s address. If so, Congratulations! You’ve had the pleasure of being the beneficiary of a cryptocurrency airdrop. [caption id="attachment_221" align="aligncenter" width="463"]
ICO sign is flying on a parachute from an airplane. Airdrop token. Giveaway.[/caption]If you’re like most people, you probably looked up the obscure coin on Google to find out what it was. At least that’s what the token creator was likely hoping for when they airdropped a coin into your digital wallet. Everyone loves free money, and in a world where Facebook, Google, and Twitter have started cracking down on conventional advertising for ICOs and exchanges, gifting free coins to the community can be a cost effective advertising strategy. In this article, we’ll dive into cryptocurrency airdrops and how you can start collecting your own free coins BTW if you are a trader have you calculated your Crypto Taxes and Accounting? What is a cryptocurrency airdrop? A cryptocurrency airdrop is when a cryptocurrency enterprise distributes its tokens directly into the wallets of a group of users for free. The idea is to leverage the existing cryptocurrency community to spread awareness about a new cryptocoin. The benefit for the startup distributing free coins through an airdrop is twofold:
- The network effects initiated by excited users telling all their friends about the free tokens they just received in their wallets.
- Mass adoption of a new cryptocurrency is a surefire way to pump up its value.
While the initial hype and adoption numbers may seem temporary, the cryptocurrency startup is banking on at least some of those users continuing to use their tokens, which can help increase the trading volume of their new coin once it gets listed on an exchange. How cryptocurrency airdrops workYour typical airdrop might look something like this:
- A new blockchain project looking to raise awareness for a new coin will set a date for an airdrop.
- They will drum up excitement for the pending airdrop, reaching out to the crypto community on Twitter, Telegram and other outlets to fill out a form with their email and wallet address to get free tokens.
- At the pre-announced airdrop date, the project will take a “snapshot” of the blockchain the new coin is based on, and if the users who signed up on the airdrop list meet the minimum requirements (usually being prior owners of coins on the relevant blockchain), they get free tokens.
There are some caveats depending on the exact situation of the blockchain project hosting an airdrop. Sometimes you get your new coins right away. Other times you could be waiting months. Other times there’s no press at all, and the project will randomly distribute coins to some users on the relevant blockchain. The networking effects still apply, because simply owning a coin might make you more likely to notice the coin on cryptocurrency market listings or click a related article. The real benefit of getting the tokens into the wallets of users is potentially seeding a community of people who own and therefore have a vested interest in the new coins. This could lead to an appreciation of value, which means more capital for the blockchain project, which is usually the single largest holder of the coin in the early stages. Airdrop vs. ICOSo where does the airdrop fit in with initial coin offerings? The best way to understand this is to put yourself in the shoes of a cryptocurrency enterprise. Since the value of your cryptocurrency depends largely on the amount of people with your tokens in their wallets, distribution is at the top of your mind. During the infancy of your new currency, the distribution strategy might look something like this:
- As the developer, your enterprise is the single largest holding of your new tokens. A currency isn’t worth much if you’re the only one who owns it.
- You launch an ICO to raise capital and seed an initial community of users of your tokens. You might open it up first to your inner circle as a private presale before opening it up to the public. This is a relatively narrow demographic of serious cryptocurrency investors.
- To greatly expand your reach, you distribute more coins through an airdrop, either randomly or to those who responded to your promotion, all the while running a traditional marketing campaign.
An ICO is, as the acronym suggests, an initial coin offering where the cryptocurrency enterprise gives investors an opportunity to buy into the new currency. Investors may pay for tokens using USD or other cryptocurrencies depending on the ICO. This is in contrast to an airdrop where users receive new tokens free of charge. Common airdrop scenariosNow that you understand the basics behind an airdrop, let’s take a closer look at the situations where a cryptocurrency enterprise might conduct an airdrop:
- Marketing Promotions: As we discussed in our definition, drumming up hype and raising awareness are some of the main reasons behind a cryptocurrency airdrop. Typically this involves a series of conventional marketing promotions and social media outreach to tease the pending giveaway and signup users on a list. Then when the date arrives, those who signed up on the list receive their tokens.
- Forking: A hard fork occurs when a major difference in opinion within a blockchain community causes one or both camps to go their separate ways. Usually a new protocol splits from the old protocol, and must award its new users new tokens equivalent to the amount they owned in the old protocol. Because the entire blockchain is cloned, everyone on the old blockchain prior to the hard fork is entitled to the coins on the new fork. Typically, the new coins will automatically be assigned to a wallet without any action required on the part of the user.
In both cases, you’ll need to make sure you have a valid cryptocurrency wallet in order to receive your free tokens. We’ll dive more into the specifics of participating in an airdrop in the next section. How to participate in a cryptocurrency airdropReady to start collecting your free tokens? Here’s how:
- You need an active cryptocurrency wallet with a personal address that supports the relevant blockchain for the airdrop that you’re interested in. Popular blockchain protocols such as Bitcoin, Ethereum, and Litecoin are your best bet for the widest reach. For Ethereum coins, make doubly sure your wallet supports the ERC20 token standard.
- Sign up for accounts on Twitter and Telegram. These are the two most popular platforms for announcing cryptocurrency airdrops. Being active in crypto communities on other popular social media channels can help expand your radar. Having an email address never hurts either.
- Subscribe to and monitor the websites of popular airdrop groups such as Crypto Airdrops, AirdropAlert, and AirdropKing. They will tip you off to pending airdrops.
- Follow the instructions of any airdrop promotions. The cryptocurrency enterprise hosting the airdrop will usually at a minimum require you to sign up on a list.
That first step, setting up a cryptocurrency wallet, is easily the most important step on this list. You need an address in order to receive your free tokens. Airdrop lists are often validated with a snapshot of the blockchain up to the date of the airdrop. Having a transaction history on that blockchain is often all you need to receive your free tokens. And there’s always the chance you’ll receive free tokens in the event of a blind airdrop or hard fork. Free cryptocoins? What’s the catch?
No catch. At least there shouldn’t be. Unfortunately, if there’s one thing that isn’t scarce in the world of cryptocurrency, it’s scams. Remember when ICOs skyrocketed in 2017? This led to a surge in scams that eventually caused governments to tighten regulations and Facebook, Twitter, and other tech giants to ban conventional advertising of ICOs and cryptocurrencies on their platforms. The ability to circumvent these advertising restrictions using airdrops makes any momentary loss of capital in giving away the free currency well worth the appreciation expected from a surge in adoption. Unfortunately, the rise in popularity of airdrops also means scammers are sure to follow. Unlike ICO scams, where a charismatic figure or marketing team could convince you to invest in an empty project, airdrop scammers are limited to identity theft. There are things you can do to greatly reduce the chance you’ll be scammed:
- Never give away your private key.
- Vet and verify a prospective airdrop before signing on a list to make sure it’s legit. Look for organic comments.
- Don’t download any wallets or other data from an untrusted third party.
- If it sounds too good to be true, it probably is.
Remember that it’s in the best interest of a legitimate blockchain project to make the airdrop go as smoothly as possible. That means you can expect to see them active on all the appropriate social media channels, and signup will be simple. A legitimate airdrop will never require your private key, only a valid wallet address.Keep in mind that airdrops may still be treated as securities, which means tax may be owed on their value. ZenLedger (Bitcoin tax calculator) can help you figure out your tax obligations for any airdrops as well as other cryptocurrency investments.