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What is a crypto airdrop?

Windfall or Hot Air – What Is a Crypto Airdrop?

Are you wondering, “What is a crypto airdrop?” Crypto airdrops distribute free tokens to promote new projects and some have been lucrative for investors. Learn how they work, the risks, and how to avoid scams.

Imagine your phone buzzing with a notification that you just received a stash of free crypto from one of your favorite DeFi projects. It might sound too good to be true, but this phenomenon—cryptocurrency airdrops—is gaining popularity for crypto projects to send free tokens or coins directly to your wallet.

Airdrops are famous for raising awareness and creating excitement for new crypto ventures. But before you expose yourself to a deluge of airdrops, you must understand them. This post answers the question “What is a crypto airdrop?”, explains how they work, and equips you with the knowledge to navigate these exciting, complex opportunities safely.

What is a Crypto Airdrop?

When a blockchain project distributes its native tokens or coins for free to a specific group of users or a wider audience, it’s called a crypto airdrop.

Crypto projects use airdrops as a marketing tactic to distribute new coins or tokens to potential customers and users. They can also be a way for cryptocurrency enthusiasts to earn money by selling the tokens they receive. In rare cases, projects might use airdrops to distribute new tokens created as a result of a hard fork.  

Not to be confused with initial coin offerings (ICOs), airdrops are free distributions of cryptocurrency tokens directly to user wallets. While ICOs involve investors purchasing new tokens to raise capital for a project, airdrops are a way for projects to generate awareness, incentivize participation, or reward existing users.

So, how exactly do these crypto airdrops work? Typically, projects leverage smart contracts to define the criteria for receiving the airdrop. For example, a project might airdrop tokens to users who hold a certain amount of another cryptocurrency in their wallets or for following accounts on social media. Think of it like a loyalty reward program, but instead of points, participants get crypto.

Types of Airdrops

There are different types of airdrops, each with its rules and requirements. Here’s a breakdown of some of the most common ones:

Standard Airdrops: As the most straightforward type, the project simply distributes tokens to a predetermined list of wallet addresses.

Bounty Airdrops: These airdrops reward users for completing tasks like following the project on social media or retweeting a post. It’s a great way for projects to gain traction and build a community.

Holder Airdrops: This airdrop rewards users who already hold a particular cryptocurrency. It incentivizes holding onto the existing tokens and promotes long-term engagement with the project.

What is a crypto airdrop?

Source: CoinDCX

There are other types of airdrops, such as raffle or exclusive airdrops. Creative coin marketers may think of even more types in the future. The key takeaway is that airdrops offer a way for crypto projects to generate interest and distribute their tokens to a broader audience.

Examples of Crypto Airdrops

Airdrops are currently trending in the cryptosphere, but they’ve been around for at least 10 years. Here are a couple of examples: 

Iceland’s 2014 Auroracoin was among the first airdrop projects. This project aimed to distribute its native token (AUR) to the entire Icelandic population, potentially paving the way for a national cryptocurrency. Ultimately, the project was not successful.

In 2020, the Uniswap decentralized exchange launched with a surprise airdrop, distributing UNI tokens to users who had interacted with the platform before a specific date. The value of UNI skyrocketed shortly after, turning a free airdrop into a lucrative windfall for early adopters.

In 2021, OpenDao distributed SOS tokens to a large audience of NFT creators, collectors, and enthusiasts who had used the OpenSea marketplace.  Recipients only had to claim the tokens from the website, attracting over 120,000 claims and significantly boosting OpenDao’s Twitter following.

Below is a current list of Airdrop projects in 2024.

What is a crypto airdrop?

Source: Zebpay

Why Would a Crypto Investor Participate in an Airdrop?

Let’s be honest: Many investors still dream of getting in on the ground floor of the next big crypto windfall. Receiving free tokens with potential future value simply for participating in an airdrop is a no-brainer. This potential is the primary allure of airdrops, and it’s why they’ve become a popular marketing tool for new projects.

The strategic approach is to weigh the potential benefits against the risks involved. Here’s a breakdown:

Crypto Airdrop Pros 

Crypto for free: The most obvious advantage is acquiring cryptocurrency at no charge. Successful airdrops can yield significant returns, as seen in examples like Uniswap (UNI).

Early Access to Promising Projects: Airdrops can introduce you to new and potentially innovative projects in the crypto space. Participating in an airdrop from a promising project with solid fundamentals could be beneficial in the long run if the project gains traction and the token value appreciates.

Community Building and Engagement: Some airdrops reward tasks that promote community building, like following a project on social media or participating in discussions. These projects can connect with a project’s community and stay updated on its development.

Are Airdrops Risky?

As with all things crypto, considering potential risks is a good idea. Here are some critical areas of caution:

Scams: Unfortunately, scammers may try to use airdrops to steal your crypto or personal information. If an airdrop promises excessive free tokens or guarantees high returns, it’s likely a scam.

Phishing Attacks: Scammers may send emails or messages urging you to claim an airdrop by clicking a link or visiting a fake website. These websites can trick you into revealing your private key or granting them access to your crypto wallet, allowing them to steal your funds.

Fake Projects: Some airdrops might be from entirely fabricated projects with no real value or purpose. They aim to collect user data or lure victims into further scams.

Tax Implications: The tax treatment of airdrops can be complex and depends on your location and the specific circumstances. In some cases, airdropped tokens might be considered income and subject to taxation.

How to Avoid Airdrop Scams

Trust your intuition – if something sounds too good to be true, it probably is. If you are feeling pressured, that’s a red flag, too. Here are some additional tips: 

Research Before Claiming: Always thoroughly research the project behind an airdrop before participating. Look for reputable sources of information, check the project’s website and social media channels, and be wary of airdrops with limited details.

Never Share Your Private Key: Legitimate airdrops will never ask for your private key because it grants complete access to your crypto wallet.

Beware of Unfamiliar Platforms: If an airdrop requires connecting a wallet you’ve never used, proceed cautiously. Only connect your wallet to platforms you trust.

Following these steps can significantly reduce the risk of falling victim to a crypto airdrop scam. The potential rewards of airdrops can be enticing, but prioritize safety and conduct thorough research before claiming any airdrops.

Crypto Airdrops FAQs: Key Takeaways for the Curious Investor

Do you still have questions? If so, you are not alone. Here are some answers to frequently asked questions to help you navigate this space:

  1. How do I find out about airdrops? Several resources can help you discover upcoming airdrops. Popular options include CoinMarketCap’s “Airdrops” section, dedicated airdrop alert websites, and following trusted crypto news sources.
  2. Do I need to pay taxes on airdrops? The tax implications of airdrops can vary depending on your location and the specific circumstances. Sometimes, airdropped tokens might be income and subject to taxation, whether you want the token or not. It’s advisable to consult with a tax professional for personalized advice.
  1. Are airdrops worth it? Participating in an airdrop depends on your risk tolerance and understanding of the project. While some airdrops have yielded significant returns, others might be scams or offer tokens with little value. Careful research and a cautious approach are essential.

Moving Ahead With Crypto Airdrops

You can confidently answer the question, “What is a crypto airdrop?”So, are you ready to take advantage of unique opportunities to learn about new blockchain projects? Remember, thorough research, prioritizing safety, and a healthy dose of skepticism are your best allies in the crypto airdrop world.

Are you a crypto investor juggling multiple wallets and exchanges? ZenLedger can help simplify your tax experience. Our platform automatically aggregates your transactions, calculates capital gains or losses, and generates the tax reports you need – including airdropped tokens (if applicable).

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Disclaimer: This information is for general purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your situation.

Kala Philo