The world of blockchain and cryptocurrency continues to evolve even as you are reading this. With it comes new terms that you would have never heard, seen, or read before – terms like DeFi, ICO, and NFT. Or terms that could have meant one thing in the real world, and mean something else entirely in the cryptocurrency world – terms like gas, fork, node, cold storage, and wallets.
Here, we shall look at one such term – Airdrop.
No, it is not the AirDrop that Apple Inc. provides to its users wherein they can share files across iOS devices and Mac computers.
What is an Airdrop in the world of cryptocurrency?
Imagine a parachute landing on the roof of your house and it brings with it a small gift or a coupon that you could use in the future to trade for something else. And you did not even have to do anything, except have a roof and access to it. That is what an airdrop is in the crypto world.
What happens in an airdrop is a company/startup transfers the digital assets it has created from the project to multiple users/wallets. They distribute their native cryptocurrency (or sometimes even NFTs) to current or potential users for free, or for a small promotional charge.
Airdrop, at its core, is a marketing strategy that first started in 2017. It is counted as a customer acquisition cost. It is adopted by a crypto startup to grab eyeballs and get some attention before the actual ICO or launch. There are different ways a company does an airdrop but the ultimate goal is the same – generate curiosity, interest, and awareness. With the ever-increasing and exponential rise of cryptocurrencies, it is important for new crypto projects to stand out and make an impression, and an airdrop lets them do just that.
Crypto startups and projects announce through various online channels that they are giving out a fixed amount of cryptocurrency to some users via airdrop on a particular date for free or for a fee. Sometimes, instead of a fee, the users are prompted to complete simple tasks like following and sharing the startup’s posts on social media, making an innovative post or reel, subscribing to their newsletter, etc. Once the date of the airdrop arrives, the project transfers the promised cryptocurrency to the winners of the tasks. Keep in mind that doing these tasks is not a guarantee that you will get your airdrop. Since the number of people who do the tasks or subscribe for the sake of an airdrop is large, the project has to circle in on only a fraction of the people who subscribed or performed the tasks. Once they have done the airdrop, there are a minimum number of assured users and an established user base that could lead to wider adoption of the cryptocurrency after its launch.
But are airdropped profitable? That is unfortunately unpredictable. It functions like a stock market and sometimes some tokens can generate huge profits. Many tokens do not give a lot of profit as the underlying project seldom has substance or was not a serious business.
Some users may get confused between an airdrop and an ICO. An airdrop requires zero investment from users and zero crowdfunding, whereas an ICO depends on investments and crowdfunding.
Types of Airdrop
- Standard airdrop- The simple kind where those interested just need to complete some basic KYC details and provide a wallet address.
- Bounty airdrop – Interested users need to perform tasks like retweeting, sharing, following the official handle, making a post and tagging some friends, joining the telegram channel, etc. Apart from completing the KYC and providing a wallet address, users will also need to show proof of having completed the task.
- Exclusive airdrop – Airdrop is drone only to certain specific individuals and not all. Usually, those receiving the airdrop would have been associated with the project in some capacity- as an active community member, developer, or early supporter.
- Holder airdrop – This airdrop distributes crypto to only those that hold a certain amount of cryptocurrency in their wallet. If the users meet a certain minimum requirement, then they can claim their tokens.
- Hard fork airdrop – This is a little different from other airdrops. When a coin undergoes a hard fork from its original blockchain, a new coin gets created. So those who held the original coin will get an equal share of the new coin that is the result of the hard fork.
How to receive an airdrop
- Due diligence – The first order of business is that you want to identify legitimate airdrops- separate the husk from the grain. This will take a fair bit of time and research from your end. You will need to look for fresh and new projects that have the potential to do an airdrop in the near future. Follow their social media handles and discord events to keep yourself up-to-date. Try to spot lesser-known and less popular events to increase your chances of receiving an airdrop. Once you find one that you are interested in, dive deeper. You will need to discard the fakes and the scams and find the ones that have credibility.
- Crypto wallet – You cannot receive an airdrop if you do not have a wallet. You cannot use the built-in wallet that comes with an exchange platform. You need one that you have complete control over. There are different types of wallets. Do your research and use one that fits your overall needs well. Metamask is a crowd favorite that you might want to look into.
- E-mail address –Airdrops require an e-mail address during the registering process. It would be better if you had an e-mail id solely dedicated to this purpose so that you can keep track of the airdrops you have applied/registered for.
- Online presence – This means you need to be present on all social media channels so that you can do the tasks in case it is a bounty airdrop. Make accounts on all the usual and popular ones like Facebook, Instagram, Twitter, Telegram, Reddit, Discord.
- Check their website – Once you have the above in place, check the official website of the crypto project. Go through their details, see what tasks they want you to accomplish, and stick to the deadlines to maximize your chances. Since the requirements for each airdrop are different, ensure that you read the directions and keep an eye on the deadlines for every airdrop that you are interested in.
Hurdles and Obstacles
Airdrops sound like a lottery system where you have a lot to gain and nothing to lose. But they do come with their set of challenges. The attraction of free tokens is very strong and dubious developers take advantage of this. Many have fallen victim to fake and fraudulent airdrops in the past. Since it falls in a grey area where there are no laws or regulations, if you lose funds, there is no way you can follow up and get your funds back.
If a project were to ask you for your bank login details, or your private key, then you better run in the opposite direction. These are most likely scamsters who want access to your funds. This is why it is essential to do proper research on the project and go through the website to see what it needs and wants before committing to it.
Some projects claim that they need access and will request you to download a particular software. These could be phishing attempts to steal information or to make your device prone to malware and spyware.
Are airdrops taxed?
The new coins or tokens that you receive as the result of the airdrop will be taxed as ordinary income. You will be taxed for receiving it even if you do not do any transactions with it. The amount will determine based on the fair market value of the coin/token at the time that it is airdropped. This should be reported on Form 1040.
If you perform any transactions, like any other asset, you will have to pay the appropriate capital gains tax.
So, when you receive it, you will be paying an income tax based on the fair market value. And when you sell it, you will be paying a capital gains tax. This should be reported on Form 8949.
Some airdrops are fast, and some are big in terms of value.
Bread – a digital wallet – launched their native cryptocurrency BRD. It got its desired number of registrations in just two hours!
Similarly, Squeezer held an airdrop and got 20,000 participants in under 60 minutes.
In terms of value, there have been quite a few airdrops worth around $500,000 in total. Minereum airdropped 32,000 MNE tokens and they peaked at $440,000 in all (biggest until now). BitcoinCash had an airdrop value of $4,300 per BCH. Decred airdropped 258,000 DCR and the highest value was $32,500. Oyster did an exclusive airdrop where each user received 2227 PRLs in November 2017. The total peak value of the airdrop was nearly $11,000.
Since Christmas 2021, airdrops have been happening fairly regularly. Most projects are trying to ride the wind and get the traction needed.
Even NFT marketplaces jumped onto the bandwagon. Looks Rare, an NFT marketplace, issued an airdrop to raise awareness. Anyone who listed at least one NFT on the platform was able to claim $LOOKS tokens. The lowest value was $400, but many active traders received higher values.
- REV3AL is an anti-counterfeit technology that helps artists protect their creations across the digital space. Rev3al is giving away a total of $16,000 worth of REV3AL. Upon completing specified tasks, 10 participants will win $1,600 worth of REV3AL
- GoCrypto is a global payment scheme that connects all crypto stakeholders – users, wallets, exchanges. It is giving away a total of $500 worth of GOC. You will need to register and complete simple social tasks. % winners will be selected who get GOC worth $100 each.
- Diffusion Finance will be doing a holder airdrop to UNI holders, OSMOS stakers, Evmosstakers, and Diffusion Early Adopters.
- BOT PLANET is an ecosystem built under the UX of an NFT-based Play-To-Earn game. It is giving away a total of 500,000 BOT to 50 participants. 10 winners will get 30,000 BOT each, 20 winners will win 7,500 BOT each and another 20 winners will win 2,500 BOT each.
Airdrops are a fun and unique way of understanding the cryptocurrency ecosystem. Just like an ICO, once you get into the game and make some mistakes, you will develop a knack for figuring out which airdrop will bring you profits and which ones are not worth the effort.