An airdrop is a distribution of free digital assets to multiple addresses/accounts. The term comes from computer games and from there to the military, meaning supplies dropped from an aircraft.
If companies are giving away digital assets for free, why are they doing it? What do they get out of it? Companies that do airdrops are often trying to build a name for themselves or grow the network of people interested in their project or token. They airdrop to get positive attention, and the airdrop acts like a free sample of their network, coin, company and project. It’s often a marketing method used by startups.
Outside of the most famous digital assets — Bitcoin, Ether, and to a much lesser extent BTS — there are a huge number of so-called ‘altcoins’ with relatively small user numbers. To lay claim to users’ attention in a crowded space with a low barrier to entry, airdrops give away something of value for free but often ask for actions in return.
How do airdrops work?
If an airdrop asks for money or capital, it’s an airdrop ICO. This is relatively unusual, though it does happen. Airdrops are often conditional, though. One common method is to airdrop Ethereum accounts with more than a certain amount in them, but ask recipients to connect with a member of the project, mention it on social media, write a blog post about it or join its Telegram group. In this way, airdrops work to piggy-back the respectability of certain voices within the digital assets community.
Advantages and disadvantages of airdrops
Airdrops work to expose experienced digital assets users to new coins. For investors primarily interested in digital assets from a financial viewpoint, this is of less interest than it is for enthusiasts and recreational or retail investors. From the point of view of companies that perform airdrops, this means they’re unlikely to be able to access an investor base of institutional and HNWI investors this way. And from the point of view of those investors, airdrops are often of little interest. However, for professionals watching the space, airdrops can be a source of information and insight about how the whole space is likely to develop.
Risks associated with airdrops
Airdop ICOs can be scams, just the way other ICOs can be. And some airdrops are vulnerable to ‘pump and dump’ scams, which work like this:
- The owners pre-mine tokens, along with some friends
- The group with pre-mined tokens trades among themselves to artificially inflate prices (pump)
- Airdrops and other giveaways tempt retail investors to put some real money into the network
- As the number of retail investors organically increases, the original group sells their tokens to new investors at inflated prices and quits with a profit (dump), leaving behind a barely-functional network with no real product or value.
Another risk is that in the USA, the tax situation isn’t always clear: should airdropped tokens be regarded as capital gains, income, or something else? No-one wants to get on the wrong side of the IRS.
To learn more about how to safely navigate the digital assets space, contact First Digital Trust.