What is Crypto Airdrop – Its Types, Taxation, Benefits and How Does it Work?
Crypto Airdrop is among one of the key strategies that have grown extremely popular since 2017 in the cryptocurrency space and is used to stand out and increase awareness for a particular project. They are usually used as a marketing strategy to give tokens to existing cryptocurrency traders.
Crypto airdrops gained popularity during the ICO boom of 2017, and many cryptocurrency ventures are still using them as a promotional strategy today. Under crypto airdrop, a small amount of the digital currency can be sent to the users’ wallets as a part of an initial offering or in exchange for promoting a brand.
Read on to find out more about this topic!
What is a Crypto Airdrop?
Crypto Airdrop is a transfer of cryptocurrency into users’ wallets for free or, sometimes, in exchange for performing a simple task. This could be sharing information about the currency on social media, writing a blog post, connecting with a member of some blockchain project, and so on.
The announcement of an upcoming airdrop is typically made on the company’s website, medium page, or third-party airdrop tracker and shared on social media channels where many cryptocurrency enthusiasts can see it.
These are aimed at users of a particular blockchain platform and involve small quantities of newly minted cryptocurrency. For instance, cryptocurrency start-ups might airdrop tokens to wallet holders of the NEO, Ethereum, or Bitcoin network. Additionally, platforms may also choose to airdrop governance tokens. These not only possess a monetary value but also grant the holders of such tokens voting rights which enables them to have a say in critical project decisions.
An important thing to be noted is that legitimate free airdrop crypto does not ask for capital investment in the currency as they are promotional.
How Does a Crypto Airdrop Work?
There are several kinds of crypto airdrops, but they often involve distributing a small amount of cryptocurrency to various wallets (usually on Ethereum or Binance Smart Chain). Some programs distribute NFTs or Non-Fungible Tokens (NFTs are unique cryptographic tokens that represent real-world items like real estate and artwork that cannot be traded or exchanged) instead of regular cryptocurrency; however, they are less common.
While some projects distribute the cryptocurrencies without asking for anything, others will require the person to perform certain tasks before claiming the currency. These tasks often involve following social media profiles, subscribing to newsletters, or holding a minimum account of coins in the wallet.
In some cases, only wallets that interacted with the project’s platform before a specific date may get airdrops. Examples of businesses supporting early adopters using this strategy include 1INCH and Uniswap, worth thousands of dollars, unlike common airdrops.
Also Read: What is Staking Crypto and How does It Work?
Why Do Crypto Projects Perform Airdrops?
Crypto projects are the biggest beneficiaries of crypto airdrop events, so they tend to give out such generous bounties. Given below are a few reasons why crypto projects perform airdrops:
1. Inducing Investments
When a project launches an airdrop, a buzz is created and, if done successfully, would help drive the prices upwards. Trending Google searches, social media mentions, and follower count on Twitter serve as a measure to gauge a project’s prospects. Hence, when community engagements increase due to an airdrop, the company’s overall capital would boost proportionately, thereby generating profits.
2. Raising Awareness
Raising and spreading awareness is one of the primary reasons why airdrops are launched in the first place. The popularity of crypto airdrops results in crypto enthusiasts actively and aggressively promoting it. Additionally, it is noted that airdrop recipients are few of the most vocal advocates for a project.
3. Rewarding Users
Investors in the crypto space usually look for the highest ROI in the short term while not caring about the project’s long-term sustainability. Thus, they tend to shift from one project to another without providing any actual value to the system. To counter this, airdrops are launched to reward loyal users who use their platforms or hold a given number of tokens in their wallets for long durations.
4. Decentralisation of Token Distribution
During a coin’s early days, rich investors may take advantage of their wealth and hoard a significant amount of its supply. This leads to the centralization of large amounts of coins in the hands of a few (for example, Dogecoin). In these cases, projects can use airdrop to balance and decentralise the token distribution.
5. Getting to Know More About its Community
Since some airdrops need the recipient to fill in their personal details such as email, contact number, social media, etc. The information obtained can be used to get oriented with the type of community the project operates in. Additionally, targeted marketing campaigns can be launched depending on this information.
What are the Types of Crypto Airdrops?
The 4 most common types of crypto airdrops are as follows:
1. Standard Airdrop
As part of the marketing strategy, a certain amount of native coin or token is transferred into the user’s current wallets. This is typically done to boost brand awareness and entice more people to invest in the asset during their ICO (Initial Coin Offering).
2. Bounty Airdrops
These are also used as a marketing tactic, but to receive the digital asset, one must take part in a promotional activity, such as subscribing to the project’s newsletter or sharing a post about it on social media sites like Twitter, Facebook, and Instagram.
3. Exclusive Airdrop
In this, a group of people receive cryptocurrency via an airdrop aggregator. These third-party websites disseminate information on upcoming airdrop events and budding cryptocurrency projects.
4. Holder Airdrops
These are offered to users who hold a certain amount of another cryptocurrency in their wallets. Usually, crypto projects snapshot all cryptocurrency holdings on a specific date and give users the option to claim airdrops based on their ownership.
Why are Crypto Airdrops Important?
Free tokens are distributed by blockchain projects to gain wider acceptance and expand their network. A higher number of holders is often regarded as a favourable indicator and leads to decentralisation of the project in terms of token ownership. Crypto airdrops also encourage users to use and spread a word about the project thus enabling it to build a strong following before it gets listed on the cryptocurrency exchanges.
What are the Pros and Cons of Crypto Airdrops?
The key to taking advantage of an upcoming airdrop is to keep up with the developments as they take place and seize the opportunities as they arise.
Crypto airdrops can increase the value of one’s cryptocurrency holdings without needing to invest in digital assets or putting in much effort. Additionally, it helps to learn more about the platform from the grassroots level.
Airdropped assets, however, could equally well be worthless. Spending time hunting for and claiming airdrop possibilities can result in the price of the coin being distributed to you dropping before you can even sell it. Even worse, there’s a chance that your sensitive and personal information might get leaked on a fraudulent platform.
Airdrops are generally worth looking into if one’s a cryptocurrency enthusiast who enjoys keeping up with new developments and actively maintaining their portfolio.
How do you Receive Crypto Airdrops?
Crypto airdrops are a great way to add to one’s existing crypto portfolio without spending any money. However, the process to claim the airdrop varies from project to project. At the very least, one is required to hold a cryptocurrency wallet when claiming the airdrop.
Given below are a few ways to track down crypto airdrops:
- Undertaking regular online searches for crypto airdrop opportunities
- Signing up for airdrop aggregators’ unique offers and following them
- Joining new platforms to benefit from any airdrops they provide
- Keeping track of forthcoming projects to prepare for bounty airdrops
How do Crypto Airdrop Scams Work?
If someone wants to obtain airdrops in cryptocurrency, they must protect themselves from airdrop frauds. These frauds usually involve fake airdrop or key scams, in which fraudsters try to get their hands on your money or private key while pretending to give you a small airdrop in return.
You should never connect your wallet to a third party or share your private key with them. Sometimes the fraudsters can airdrop a fake token in your wallet without you noticing it until you can’t sell or exchange it.
Finally, one should investigate the project’s leadership and review its public documentation before claiming an airdrop.
What are the Tax Implications of a Crypto Airdrop?
One must pay taxes on their earnings by most platforms that airdrop cryptocurrency. Airdrops are typically taxed as ordinary income at their fair market value on the day they are received.
You might also have to pay capital gains taxes on the asset’s growth during your holding period if you decide to sell the airdropped asset.
Also Read: What Is Crypto Fear and Greed Index And How To Use It To Your Advantage?
How do Crypto Airdrops Differ from Hard Forks?
Airdrop in cryptocurrency is primarily used to promote the use of new coins. While both hard forks and airdrops allow users to receive new coins, they are fundamentally two different concepts.
Hard forks take place when one blockchain splits into two individual, parallel chains. Owners of coins on the original chain could now acquire coins on the new, distinct chain after the split. In other words, in this case, a cryptocurrency splits into two different currencies.
A hard fork occurs when the blockchain’s user base disapproves of how the current blockchain is operating. As a result, the old chain cannot recognize blocks made by the consensus rule of new chains because of the validating software changing (since the new chain replaced the old one). The users are then each given an equal amount of the new cryptocurrency.
Final Word
Cryptocurrency airdrops are a relatively risk-free process and an excellent marketing strategy because they serve as community incentives for new projects and early backers. Although they might initially seem underwhelming, they are extremely valuable to cryptocurrency enthusiasts or beginners looking to make early free investments in worthwhile projects. Additionally, it offers incredible opportunities for cryptocurrency projects to stand out, gain wider acceptance, and broaden their market penetration. To avoid being taken advantage of by scammers, one must exercise caution and do their research before taking part in these projects.
FAQs
Ans: Yes, crypto airdrops are safe, given that one has done their research about the project they want to participate in and have made sure that it is legitimate. Safety measures also need to be undertaken, for e.g., never sharing your private key with a third untrusted party or connecting your wallet to one, etc. in order to avoid getting scammed.
Ans: One is required to pay taxes on their earnings by the majority of the platforms that airdrop cryptocurrency. On the day they are received, airdrops are typically taxed as ordinary income at their fair market value. You might also have to pay capital gains taxes on the asset’s growth during your holding period if you decide to sell the airdropped asset.
Ans: There are 4 main types of crypto airdrops, namely, standard, bounty, exclusive, and holder airdrops.
Ans: A few ways to track airdrops are as follows:
• Undertaking regular online searches for crypto airdrop opportunities
• Signing up for airdrop aggregators’ unique offers and following them
• Joining new platforms in order to benefit from any standard airdrops they provide
• Keeping track of forthcoming projects to prepare for bounty airdrops
Ans: These tasks often involve things like following social media profiles, subscribing to newsletters, or holding a minimum account of coins in the wallet. Even so, there is no guarantee to get the airdrop tokens.
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Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
