What Is A Crypto Airdrop And How Does It Work?

You might have heard about crypto token airdrops as a popular way to get free cryptocurrency with little to no effort involved. In most cases, the offer of something free is an offer that is too good to be true, and likely is. But in the case of various blockchain airdrops, there are several underlying reasons that give cryptocurrency startups and other early crypto projects incentive to do so.

This guide will explain all the ins and outs related to crypto and blockchain airdrops, along with information on how to take advantage of them, how to set up airdrop alerts to watch for upcoming airdrops, and much more. We’ll also dig into the risks associated with crypto airdrops which many investors and crypto enthusiasts might overlook due to the fact these coins come at no cost at all.

Introduction To Crypto Airdrops And The Wacky World Of Free Tokens

The cryptocurrency industry is still young, unregulated and is a wild west of sorts that keeps investors on their toes. New sectors are popping up each day and growing at an unprecedented rate. DeFi is booming, NFTs are now everywhere and the community is always hungry for whatever is to come next.

But sometimes investing can be costly at early stages, and risking hard earned capital can be a tough sell. However, sometimes cryptocurrency airdrops come and go that give early users access to new crypto tokens with incredible value, all before the rest of the market catches on and price discovery follows.

Throughout this guide, we’ll explain what airdrops are, and provide examples of why airdrops are worth your time, as well as any challenges they pose to investors they need to be aware of.

What Is A Crypto Airdrop?

Cryptocurrency airdrops occur when a new crypto project or cryptocurrency startup widely distributes a large number of crypto tokens to a massive list of crypto wallet addresses. The goals of this type of free crypto token distribution vary depending on the project. 

Crypto airdrops, although free, should not be written off as worthless. While they are sometimes worthless to start, so was Bitcoin at the very beginning and today it is worth more than $30,000 per coin.

How Does Crypto Airdrop Work?

Blockchain airdrops work via a crypto wallet that lives on the blockchain. During a pre-defined phase announced by the crypto project, the company or team behind the project will begin collecting crypto wallet addresses in some manner. Oftentimes this must be done manually by the users, signing transactions with the wallet to properly connect the wallet to the blockchain.

However, in some cases, the coins are simply airdropped for free without any intervention by the individual users. And in many cases users might not even know they will be receiving tokens. In even rarer scenarios, users can sometimes be delighted to find out the coins they were airdropped are now worth tens of thousands of dollars.

Why Do Crypto Projects Do Airdrops?

Cryptocurrency airdrops happen for all kinds of reasons, and rarely just one is the cause. The motivations vary widely project by project, but here are some of the most common factors behind why a crypto project would want to distribute tokens this way and issue a blockchain airdrop.

Creating Awareness

This is by far the biggest factor fueling crypto airdrops today. According to CoinMarketCap, there are thousands of coins out there, and aside from Bitcoin, Ethereum, and a handful of others, it is difficult to stand out in the sea of competition and get recognized by potential users. The allure of free coins or free anything for that matter is often enough to get people interested who otherwise wouldn’t be.

Decentralization

Decentralizing the token supply is yet another solid reason for crypto projects to conduct an airdrop distribution of tokens. By leveraging an existing blockchain that is highly decentralized, depositing airdropped crypto tokens into these active addresses ensures proper decentralization, boosting the integrity of the protocol.

Reward Users 

Airdrops are often issued to users of a platform as a thank you for being an early supporter. Such is the case with Uniswap’s UNI token, which was given to early users of the automated market making platform.

Associated Airdrop Risks And How to Manage Them

Airdrop risks are not common, but they do exist. The biggest risk associated with getting involved in crypto airdrops is having the company or even hackers access personal or private information related to the airdrop. With some personal details, a wallet address, and more, schemes can be developed to separate the users from their coins. For example, these users could become targets of phishing attacks, hacks, or worse.

There’s also some risk associated with the responsibility surrounding accounting and bookkeeping. Receiving any airdrops in crypto is the same as receiving property or assets like real estate as a gift – this means that when they are eventually sold, it is a taxable event and the user owes capital gains on the entire value of the token they were given for free.

Be certain you fully understand all associated tax burdens related to cryptocurrency airdrops.

A Short History Of Crypto Token Airdrops

The very first recorded crypto token airdrop was for a project called Auroracoin, dubbed as the  “cryptocurrency for Iceland.” It was distributed via Airdrop to the country’s citizens in March 2014. It also was possibly the first ever crypto pump and dump scheme, as the price appreciated quickly and then retraced back to early pricing.

At the highest ever price, Auroracoin was at $80 each, and today is only trading at $0.23. It proves that not all airdrops are always worthless, but they can be in just one example.

From that date forward, cryptocurrency airdrops became a somewhat regular occurrence and a way to get in on the ground floor of new projects.

The Best Crypto Airdrops Of All-time

As we’ve mentioned, crypto aidrops might be free, but that doesn’t mean they’re worthless. Even Bitcoin at one point had no value just like these free coins. Stellar lumens, a once top ten cryptocurrency by market cap, started out as an airdrop and some of the most valuable tokens today were airdropped. 

Here are some of the best airdrops of all-time.

Following the official blogs or social accounts of the crypto projects you are interested in is the fastest way to be alerted to when that particular project is running an airdrop.

Summary: Are Crypto Airdrops Worth It?

Crypto airdrops are cool and as past examples have shown can make you a small fortune for free. Free coins are almost never a bad thing, but depending on which country you live in, these free coins might not be worth the tax burden associated with capital gains tax and reporting income. This shows just how behind the current monetary infrastructure is and how unsupportive it is of crypto technologies. In the future, participating in crypto airdrops could be easier and classified under different tax guidance.

Investing in crypto or trading Bitcoin and Ethereum on margin is a lot more straightforward and easier to get involved in. There’s no watching news feeds or scouring the internet for free coins. Instead, you will be trading crypto-based derivatives contracts, which settle in cryptocurrencies, increasing your stack and holdings with each successfully closed trade.

Crypto Airdrops FAQ: Commonly Asked Questions About Crypto Airdrops

Crypto token airdrops vary by project and the way to claim free tokens changes with every airdrop, making it confusing for crypto investors that are new to blockchain airdrops.

Are Crypto Airdrops Safe?

Crypto airdrops are for the most part safe, however, there are still some risks. Personal or wallet information can be stolen if you aren’t careful, and this could lead to hacks or worse. There also could be a tax liability.

Are Crypto Airdrops Worth It?

Free airdrops might always seem worth it, however, it might not be worth the bookkeeping and taxable event that will be created if the airdrops are ever sold or traded for another type of coin.

How Do I Get Airdropped Crypto?

Getting airdropped crypto is usually easy and just involves connecting a wallet or copying and pasting an address into a whitelist or website form.

What Was The Best Crypto Airdrop Ever?

While this is subjective and it is still early to tell, thus far the most successful crypto airdrop has undoubtedly been Uniswap’s UNI token which today is worth more than $10,000 for the 400 tokens given for free. This example also shows the tax liability of airdrops for US investors, who have to report any capital gains to the IRS. This can reach as high as 30%+ of the value of the assets sold, adding a cost associated with cashing out these “free” coins.

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