What Is a Cryptocurrency Airdrop?

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DEFINITION
A cryptocurrency airdrop is a mass distribution of cryptocurrency to many digital wallets.

A cryptocurrency airdrop is a mass distribution of cryptocurrency to many digital wallets. Cryptocurrency airdrops are commonly used to distribute new digital currencies to large numbers of people. An airdrop often follows either the launch of a new currency or an event that results in a cryptocurrency being split in two.

If you’re interested in cryptocurrency, then you may want to know more about cryptocurrency airdrops. Keep reading to understand what a cryptocurrency airdrop is, how airdrops work, and how to participate in a cryptocurrency airdrop.

Definition and Example of a Cryptocurrency Airdrop

A cryptocurrency airdrop is the mass distribution of a virtual currency. Airdrops are usually free to receive, especially if they are designed to promote a new cryptocurrency. A cryptocurrency airdrop may also occur if an existing cryptocurrency is split into two separate versions.

Promoters of the BitRewards (BIT) cryptocurrency in 2018 used an airdrop to promote BIT. The airdrop’s organizers distributed 640 BIT tokens, worth about $10 each, to a maximum of 15,000 people. Airdrop recipients, to qualify, were obligated to join the BitRewards Telegram group and follow BitRewards on Twitter, with the opportunity to earn additional BIT for referring friends to the airdrop.

The split of Bitcoin and Bitcoin Cash in 2017 is an example of a blockchain event that preceded a cryptocurrency airdrop. The airdrop distributed free Bitcoin Cash (BCH) to anyone who owned Bitcoin at the time of the split.

Types of Cryptocurrency Airdrops

Although there aren’t any restrictions on when a cryptocurrency airdrop can occur, cryptocurrency airdrops generally fit into two main types:

  • Airdrop to promote a new cryptocurrency: Some promoters of new cryptocurrencies use airdrops to draw attention to initial coin offerings (ICOs). Distributing a new cryptocurrency for free to many users can increase awareness and adoption of a new currency.
  • Airdrop to distribute cryptocurrency after a hard fork: When a cryptocurrency blockchain splits into two separate versions—known as a hard fork—an airdrop can be used to distribute the new version of the cryptocurrency. Just like airdrops for completely new digital currencies, an airdrop following a hard fork can jump-start adoption of the newly forked currency.

Cryptocurrency airdrops can be scams. Airdrops have been used to gain access to crypto wallets and steal other cryptocurrency assets stored by those wallets. Proceed with caution when considering a cryptocurrency airdrop.

How Cryptocurrency Airdrops Work

Although each airdrop is unique, here’s how a cryptocurrency airdrop typically works:

  1. Participants sign up for an airdrop: An airdrops may be publicized through a crypto project’s website or social media accounts and may be listed on airdrop-focused websites.
  2. Airdrop participants meet any specific airdrop requirements: Prospective participants in an airdrop may be obligated to meet specific requirements or take specific actions. Becoming eligible for an airdrop may require holding a certain cryptocurrency or taking action by sharing a cryptocurrency project on social media.
  3. Airdrop is conducted: To complete the airdrop, the airdrop’s organizer initiates transactions that send the cryptocurrency to the digital wallet of every eligible participant. The airdrop may be completed through the use of smart contracts.
  4. Cryptocurrency is deposited in participants’ wallets: Digital wallets that are compatible with the cryptocurrency being airdropped can successfully receive the free cryptocurrency. The airdropped cryptocurrency appears in participants’ wallets automatically. 
  5. Amount of circulating cryptocurrency increases: The number of coins circulating for the new cryptocurrency increases, perhaps dramatically, following the completion of a cryptocurrency airdrop.

Pros and Cons of Cryptocurrency Airdrops

Pros
  • Opportunity to receive cryptocurrency for free

  • Can learn about blockchain technology

  • Opportunity to participate in new cryptocurrency projects


Cons
  • Some cryptocurrency airdrops have special requirements

  • Cryptocurrency airdrops may be scams

  • Proceeds from cryptocurrency airdrops are taxable


Pros Explained

  • Opportunity to receive cryptocurrency for free: A cryptocurrency airdrop can enable you to add to your crypto portfolio at zero cost.
  • Learn about blockchain technology: Especially if you receive a cryptocurrency airdrop following a hard fork, participating in an airdrop can boost your understanding of blockchain technology.
  • Opportunity to participate in new cryptocurrency projects: When a new currency is launched, or one cryptocurrency splits into two, an airdrop can enable you to participate in that new crypto project from the beginning.

Cons Explained

  • Some cryptocurrency airdrops have special requirements: You may be obligated to post publicly about a cryptocurrency, or own a specific coin, to benefit from a cryptocurrency airdrop.Receiving a crypto airdrop also requires having a compatible digital wallet.
  • Cryptocurrency airdrops may be scams: Some airdrops are ploys to gain access to a large number of cryptocurrency wallets, in order to steal those wallets’ funds.
  • Proceeds from cryptocurrency airdrops are taxable: The Internal Revenue Service (IRS) treats cryptocurrency received in an airdrop as taxable income. Receiving a crypto airdrop may be a taxable event.

Do I Need a Cryptocurrency Airdrop?

You don’t need to participate in a cryptocurrency airdrop. Signing up for crypto airdrops can be a fun way for crypto enthusiasts to engage with digital currency communities and learn about new blockchain projects. But even without receiving any airdrops, you can still invest in or trade cryptocurrency.

Key Takeaways

  • A cryptocurrency airdrop is a large free distribution of cryptocurrency.
  • Airdrops are used to publicize new cryptocurrencies or distribute cryptocurrency after an existing digital currency splits into two versions.
  • Many cryptocurrency airdrops are legitimate, but cryptocurrency airdrops can be used to steal other digital assets.


Article Sources

  1. IRS. “26 CFR 1.61-1: Gross Income.” Accessed Feb. 1, 2022.

  2. IRS. “Bitcoin/Cryptocurrency: An Introduction and the Related Tax Consequences of Buying, Holding, and Selling.” Accessed Feb. 1, 2022.

  3. Airdrops.io. “BitRewards.” Accessed Feb. 1, 2022.

  4. Bitcoin Cash. “Peer-to-Peer Electronic Cash.” Accessed Feb. 1, 2022.

  5. Federal Trade Commission. “FTC Decrypting Cryptocurrency Scams Workshop.” Accessed Feb. 1, 2022.

  6. CryptoMultisender. “Our Airdrop Smart Contract.” Accessed Feb. 1, 2022.

  7. University of Miami Business Law Review. “Airdrops: “Free” Tokens Are Not Free From Regulatory Compliance.” Accessed Feb. 1, 2022.

  8. World Economic Forum. “Cryptocurrencies: A Guide to Getting Started.” Accessed Feb. 1, 2022.

  9. IRS. “Frequently Asked Questions on Virtual Currency Transactions.” Accessed Feb. 1, 2022.