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What are airdrops and how do they work?

While often a marketing stunt to get some publicity, an airdrop gets you some free crypto.

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An airdrop involves a company giving away free crypto coins or tokens. The value of these tokens or coins is typically very little — so then, what’s the purpose of these giveaways?

What’s an airdrop?

Not to be confused with the Apple AirDrop service, an airdrop in cryptocurrency is a marketing stunt to promote awareness — often by crypto startup companies or by an existing company looking to create buzz around a new coin. They can also be used to reward users who were early supporters of the company, project or chain developers.

The intent with these giveaways is to promote and adopt a token or coin, or to persuade people to use the company’s platform. Airdrops have the same spirit as free coupons, discount codes or other promotional products. It’s a simple, efficient and low-cost marketing tactic.

However, to become a recipient in an airdrop, you may need to follow an account on social media, enter into a draw, share promotional content online or something similar. It may be as simple as using a hashtag on a post to receive the drop, but there’s often a small task involved to participate in a standard airdrop.

How do airdrops work?

The tokens or coins are automatically distributed to accounts participating in the airdrop after the user is registered. This may require entering an email, scanning a QR code or having an account with the company hosting the airdrop.

If there’s a task you need to perform — like sharing a post on social media or using a hashtag on a post — you’re either given access to the drop after it’s completed or the coins are sent to you automatically.

The tasks and instructions required to join an airdrop are generally well-advertised since the developers or company want people to enter to create buzz. Often, the requirements are summarized on social media channels or online forums, typically Twitter, Reddit or Discord. Or the instructions are sent directly via email or through the company’s newsletter.

To participate in these airdrops, follow crypto companies on social media, subscribe to newsletters, join Discord servers or subreddits — these venues are where airdrops are advertised.

Are airdrops effective?

The more interest or buzz surrounding a specific coin or token, the more likely its value will increase. The value of any crypto coin is largely determined by consumer interest.

If a new crypto coin is airdropped to multiple accounts and the participants are required to post about it on social media, hype can build around the project. And since these airdrops are free and the required tasks are typically easy to complete, users are more likely to participate.

Types of airdrops

While airdrops are a new marketing strategy, there are already four main types:

  1. Standard airdrops typically involve completing a small task to become eligible, then the coin or token is sent to your wallet’s address. Open to the public.
  2. Exclusive airdrops are for specific users who have shown loyalty to a company or project. These may include users who originally contributed to a company in its startup phase — Kickstarter projects, for example — or users with a long-time history with a company. Often used to reward early adopters.
  3. Bounty airdrops involve online tactics or specific tasks like sharing social media posts or creating a post to promote the company or project. These are often pushed to users with a large online following. May also involve requiring users to refer other users to the company or project.
  4. Holder airdrops are reserved for users who already own a specific coin or token. May require users to hold a specific amount to be eligible for the airdrop.

In holder and exclusive drops, users may not even have to do anything to get the free tokens or coins — they might just appear in their account or wallet.

Are airdrops taxable?

Airdrops are taxed as income by the IRS. The IRS Notice 2014-21 and Notice 2019-24 provide guidance on how to navigate taxation on cryptocurrency, called virtual currency in the notices.

Whether you intend to participate in an airdrop or not, coins received this way are considered taxable income.

Are NFT airdrops worth it?

Getting a free crypto coin or token could be worth it depending on what you do with it. And if your only task was to retweet something, use a hashtag or share a post, free coins are a decent payout — especially if they’re valuable.

You could sell the digital assets — which would yield profit since you got it for free. Or you could hold it and wait for its value to increase, or sell it as it shows signs of peaking. Another option could be to use the free cryptocurrency to buy other virtual assets, like NFTs or in-game metaverse items.

Remember that any yield is taxable.

Airdrop scams to watch out for

Unfortunately, airdrop and crypto scams do exist. Some to keep an eye out for include:

  • Fake airdrops. Phishing scams are rampant in nearly every sector of crypto, but airdrop ones can really hurt. These phishing scams could involve a “new” company contacting you about receiving free crypto, gathering your information or wallet passcodes and usernames, then taking your assets or hacking your accounts. Always be on the lookout for suspicious activity, offers that seem too good to be true or strange newsletters in your inbox.
  • False promises. This may involve a scammer asking you to invest money in a new coin with promises of a guaranteed payout. However, there’s never a guarantee that you’ll make money investing in cryptocurrency. Any mention of guaranteed payouts should be considered a red flag.
  • Payment first, crypto later. If you see an advertisement claiming that they’ll airdrop you coins after you submit a payment, it’s a scam. Airdrops are always free: that’s how they function.
  • Fake verifications. Your crypto wallet is protected with passwords and passphrases. Scammers may email you claiming to be a wallet’s representative and ask you to send your wallet’s passphrases for “verification.” Never give out your wallet’s passphrases to anyone and contact the company directly if you see suspicious activity.

Cryptocurrency isn’t regulated by a government agency or large entity. If your accounts or wallets are hacked, it’s usually impossible to recover your stolen assets — so stay vigilant.

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