Airdrop part 2

Crypto Airdrop Scams

A legitimate crypto airdrop never seeks capital investment in the currency. Its aim is purely promotional. On other hand, some crypto scams involve sending micro amounts of bitcoin or other cryptocurrencies to unsuspecting recipients in what is known as a dusting scam.
Many airdrop scams rely on directing an investor to attach their wallet to a phishing website in order to claim their airdrop. Often, the web3 address will prompt a user to connect their wallet using common and popular wallet services such as MetaMask, Trust Wallet, or Oasis. After a user connects their wallet by providing their secret phrase or keys, the scam is complete.
Airdrop scams may also occur by enticing market participants to invest in a specific security in hopes of being airdropped a different item. For example, a project may boast that holding certain NFTs in a wallet will cause owners to receive a rare airdrop. Though the airdrop may be legitimate, the project owners may have enticed market activity of the NFT so they could sell theirs at a higher price.

How to Avoid Airdrop Scams

Users should always be vigilant about unsolicited deposits into their crypto wallets. In addition, users should be aware of the projects they are investing in or attempting to claim assets for. The common phrase among cryptocurrency explorers is to "do your own research".
It's advised that crypto-enthusiasts not connect to websites they are not familiar with. This includes ensuring external links they click on come directly from the project. Consider bookmarking common sites you plan on visiting frequently to ensure you're always connecting to the right site.
Companies often publicly communicate airdrops and other promotions. Consider following the project on social media, forums, or Discord to follow upcoming events, and be mindful that complex scams may replicate or imitate project social media profiles.
If you don't want airdrops associated with primary investments, consider creating a new wallet specific to airdrops. After receiving the tokens, you can then transfer the tokens to different wallets. Though not a form of traditional diversification, keeping crypto in different wallets does spread and reduce overall risk.
Cryptocurrency transactions—including airdrops—have evolved, complex tax legislation that requires care and consider. If you are unsure about the taxable status of a crypto transaction, consult a tax professional.

Crypto Airdrops and Taxes

Whether or not an airdrop counts as a taxable event depends on the jurisdiction of where the token holder is living in. In the United States, crypto airdrops are considered income as part of one's Federal income tax return.1
The difficulty of reporting taxes on an airdrop is the token may not yet have liquidity or an easily assessable fair market value. An airdrop should be recognized as income at its fair value when it is received. In addition, airdrops are not considered taxable income until an individual has control over the token. If the airdrop is locked or on a vesting schedule, it is not taxable income until it is received and can be traded.
Should the price of the airdrop drop after receipt and then later sold, this transaction creates a second, unrelated transaction that occurs in a capital loss.1
 The taxpayer would recognize income for the amount of the airdrop, then recognize a loss equal to the different between the airdrop price and sale price. If the price should appreciate, a short-term or long-term gain may be taxed based on the holding period.

Advantages and Disadvantages of Cryptocurrency Airdrops

Advantages

Given the extreme competition among cryptocurrency startups, an airdrop is an attempt to stand out from the crowd. Some businesses devoted to crypto airdrops offer alerts to users and listing services to startups, plus a range of marketing services to fine-tune their airdrops. As always, there are good businesses and bad in this space.
Michael J. Casey, Chair of CoinDesk's advisory board and an advisor at MIT's blockchain research initiative, argued in a post on a CoinDesk blog that some type of marketing is essential if a cryptocurrency is to succeed. "A currency is nothing if it is not widely used. And that can't be achieved unless people make some cost-incurring effort to encourage widespread usage," he wrote.2
Certain crypto airdrops also have the advantage of rewarding loyal patrons of specific blockchain networks. In addition, sending airdrops to all wallet or existing token holders widely distributes tokens in a manner that may not happen naturally in an open market.

Disadvantages

However, there are several issues to consider in regard to crypto airdrops. The obvious concern is network safety, especially the nature of "redeeming" airdrops. For example, some airdrops may claim users must connect their wallet to suspicious websites; once the connection to web3 is made, the thief may now have access to the user's keys or password.
Crypto airdrops may also not be legitimate projects. Though enticing due to the nature of receiving free money, some projects lure stakeholders into increasing the stake of their airdrop by buying more tokens. Ultimately, the long-term goal may be to "rug pull" investors by dumping large amounts of tokens into the marketplace at once, crashing the price and making prior airdrops worthless.
Airdrops may be seen by some as low-quality projects. Some may prefer to instead focus on rewarding miners or other contributors of a network instead of releasing free tokens to non-heavy contributors of a project.
Last, since airdrops may lack liquidity, airdrops may literally be worthless if they can not be traded on an open exchange. Often the result of the infancy of a project, airdrops may claim to have a value of thousands of dollars. However, without the ability to openly trade the airdropped tokens, the free gift to wallet holders may prove to be worthless.

Crypto Airdrops

Pros

• Rewards early adopters or people engaged with a project with a stake in the project
• Raises awareness of a project due to the marketing aspect of an airdrop
• Encourages the use and adoption of a newly issued token
• May distribute tokens across holders in a manner that would not have naturally happened in an open market

Cons

• May pose security threats if wallet holders must connect wallets to suspicious sites to claim airdrop
• May prove to be "pump-and-dump" schemes
• May dissuade some investors from participating if they prefer different ways of distributing tokens
• May prove to be worthless if the token does not have liquidity on an exchange

Crypto Airdrops vs. Initial Coin Offerings (ICO)

Crypto airdrops and initial coin offerings may appear to be very similar. Both are likely to occur at the start of a project, and both are intended to distribute coins or tokens.
Crypto airdrops may not require an investment, while initial coin offerings often require a transaction. Though the transaction may reward investors by offering coins or tokens at a discount, it is expected that investors buy the coins or tokens as opposed to airdrops which are free. ICOs are often initially offered first to venture capitalists.
In addition, the demographic for these two events are largely different. ICOs attempt to attract larger investors who are willing to infuse capital into a project. These users are more likely to pursue the project as an investment. Alternatively, airdrops are often intended to raise awareness among smaller users. Though users may not have much use for a small airdrop, the goal is to entice smaller users to transact with the digital currency.

Real-World Examples

At the end of 2021, Gas DAO was formed to distribute tokens to individuals who had paid a certain threshold of Ethereum gas fees. The concept was ownership of the DAO would be tied to the largest users of Ethereum. 55% of Gas DAO tokens were airdropped to 634,429 eligible wallets.3
Also at the end of 2021, the OpenDao distributed tokens to NFT holders based on OpenSea trading activity. Ownership of OpenDao tokens would be airdropped based on NFT-ownership, forming an entity structure driven by the most ambitious collectors.4
 At it's peak, OpenDao had a market cap of greater than $250 million. As of September 2022, its market cap had dropped to less than $11 million.5

What Was the First Crypto Airdrop?

The first cryptocurrency airdrop is attributed to AuroraCoin (AUR) on March 25, 2014. Intended to be the cryptocurrency for the nation of Iceland, every citizen or permanent resident who submitted their national ID received 31.8 AUR.6

What Is an NFT Airdrop?

Similar to other types of crypto airdrops, an NFT airdrop credits NFT holders with additional tokens. This is done to build a stronger community around certain NFTs, create buzz, and reward NFT holders.

Did the Country of El Salvador Do a Bitcoin Airdrop?

Yes. To encourage Bitcoin adoption as the country expanded its legal tender to Bitcoins, El Salvador credited everyone who installed the government-built wallet with $30 worth of BTC.7

How Do I Find Crypto Airdrops?

Crypto airdrops are often communicated and marketed to the general public to raise excitement and awareness regarding a token. Many of these airdrops can be found by subscribing to airdrop newsletters or following blockchains on social media.

Can You Make Money From Crypto Airdrops?

Individuals can make money from crypto airdrops, though crypto airdrops are intended to increase use of a cryptocurrency across a broad range of users. For that reason, airdrops are often not substantial amounts (less than $10), and the tokens may not be liquid. Also, there is higher risk that users will try to liquidate their holdings when they are able to (thus quickly dropping the value of the coins or tokens).

The Bottom Line

Crypto airdrops are a way for companies and projects to raise awareness of their token or coin. It is also a way to increase the liquidity of their security by giving it away to thousands of different wallets. Though airdrops have value and may be considered free money, there are also significant risks if users are not aware of potential scams related to crypto airdrops.