Crypto airdrops are marketing tools that could result in free token deliveries. Learn more about the pros and cons, the different types, and if they’re worth pursuing.
Traditionally, airdrops are a marketing strategy that crypto projects employ to incentivize the use of their platform. New projects may airdrop crypto into your wallet as part of an initial offering, or as a reward for promoting the brand.
Airdrops are a way to acquire digital currency without buying it. Learn more details below.
What is a crypto airdrop?
A crypto airdrop is a transfer of free cryptocurrency from a crypto project into users’ wallets.
There are several situations where one might decide to initiate an airdrop, but the effect is always the same—the crypto investor receives some amount of coins or cryptocurrency tokens, often for free or for executing a simple task.
In some cases, you may also have to identify yourself through the know your customer (KYC) verification to participate in an airdrop program.
Crypto airdrops might be a reward for signing up for a newsletter, following the project’s social media pages, or another way to bring attention to the brand and attract more people to the platform.
Platforms can also decide to airdrop governance tokens. In addition to their monetary value, governance tokens give holders voting rights and let them influence significant decisions regarding the project.
What are the pros and cons of crypto airdrops?
Crypto airdrops could be a way to bolster your crypto portfolio without having to buy digital assets. They could also help you get on the ground floor of a new platform.
However, airdropped assets could just as easily be worth nothing. You could spend time looking for and claiming airdrop opportunities, only for the price of the airdropped coin to drop before you have a chance to sell.
Even worse, there’s the risk of giving money or sensitive information to a fraudulent platform.
It’s more likely that airdrops are worth pursuing if you’re a crypto enthusiast who enjoys keeping up with new developments, and actively manages your portfolio on a frequent basis.
What are different types of airdrops?
Crypto projects may give away free crypto in several different situations, although their main motivation is to incentivize users.
The most common types of airdrops you’ll see are the following:
- Standard airdrop
- Bounty airdrop
- Exclusive airdrop
- Holder airdrop
What is a standard airdrop?
A standard cryptocurrency airdrop transfers an amount of native coin or token into existing wallets as a marketing strategy.
It’s usually to promote the brand and encourage more people to adopt the asset, often during their initial coin offering.
Generally, all you need to do is sign up for an account with the new project, and provide your wallet address during the distribution event.
What is a bounty airdrop?
Bounty airdrops are also a marketing strategy, but potential recipients have to engage in some promotional activity to receive the digital asset.
These activities could include:
- Sharing a post about the blockchain project on Twitter or other social media platforms
- Signing up for the project’s email newsletter
- Joining a forum to discuss and participate in the project
It takes a bit more work to get a free token through a bounty airdrop as opposed to a standard airdrop, but the activities usually aren’t demanding.
What is an exclusive airdrop?
An exclusive airdrop sends crypto coins out to a group of people who follow an airdrop aggregator. These third-party sites share news about promising crypto projects and their upcoming airdrop events.
What is a holder airdrop?
Holder airdrops go to people who have some amount of another cryptocurrency in their wallets. Usually, the crypto project takes a snapshot of crypto holdings on a specific date, then lets people claim an airdrop based on their ownership at that time.
For example, Stellar is a crypto project that started in 2014. In 2016, its leaders announced a plan to airdrop $19 billion worth of lumen (XLM), its native cryptocurrency, to existing holders of bitcoin (BTC) as a nod of respect to the Bitcoin network.
To receive the reward from the Stellar airdrop, you had to verify your BTC holdings in order to claim the XLM.
How do you receive crypto airdrops?
Crypto airdrops can be a great way to add to your crypto portfolio without having to buy any assets using fiat currency.
Some ways to track down crypto airdrops are:
- Performing regular searches online for crypto airdrop opportunities
- Following airdrop aggregators and signing up for their exclusive airdrops
- Signing up for new platforms to take advantage of any standard airdrops they offer
- Monitoring up-and-coming projects to prepare for bounty airdrops
Taking advantage of an upcoming airdrop is mostly a matter of keeping up with developments and jumping on opportunities as they arise.
How do airdrop scams work?
If you’re going to pursue airdrops, you need to protect yourself against airdrop scams. These may include fake airdrops or fake key scams, where scammers try to get a hold of your money or private key under the pretense of giving you a token airdrop in return.
Remember, never give out your private key or connect your wallet to an untrusted party. In some cases, the scammers will even airdrop a fake token into your wallet, and you won’t discover the fraud until you’re unable to sell or exchange it.
Consider studying a project’s leadership, reading its public documentation, and gauging other investors’ sentiments before claiming an airdrop.
What are the tax implications of a crypto airdrop?
If a platform does airdrop crypto into your wallet, you generally have to pay taxes on the proceeds. Typically, airdrops are taxable as ordinary income at their fair market value on the date received.
If you dispose of your airdropped asset, you may also need to pay short-term or long-term capital gains on any increase in its value during your holding period.
To learn more, explore our resources:
- Cryptocurrency Tax Checklist
- Cryptocurrency Tax Reporting: What To Include on Your Tax Return
- Understanding the Cryptocurrency Tax Rate
- Cryptocurrency Tax Laws in 2021: What You Need to Know
How do air drops differ from hard forks?
Air drops are primarily concerned with boosting the adoption of a new coin. Hard forks are similar to airdrops in that you can get new coins, but they are fundamentally different occurrences.
A hard fork is an event where a single blockchain splits into two separate, parallel chains. Holders of coins on the original chain could also receive coins on the new unique chain after the split.
Hard forks may happen because members of the blockchain’s community disagree with the current blockchain’s functionality. If not all miners agree to the new changes, a fork in the chain will occur.
When this does happen, the validating software on the new chain changes, and the old chain no longer recognizes the blocks being created based on the new chain’s consensus rules. Then, users may receive an equal amount of the new cryptocurrency.
For example, Bitcoin went through a hard fork in 2017, giving birth to Bitcoin Cash. People with BTC at block 478558 on August 1, 2017, either on a supported exchange or in a private wallet, were eligible to claim bitcoin cash (BCH) equal to their BTC holdings.
How Taxbit can help
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