Headline: What is an “airdrop” and what scams could they be a part of?

Date: 8/16/2022

Body:  Nearly everybody has seen the Hunger Games scene where on character is dying of blood poisoning, and a silver parachute comes  gliding gracefully down just outside the cave entrance where the character is hidden.   Attached to that canopy was the elixir that would bring him back to perfect health.   In cryptocurrency, there is something similar, and it is called an airdrop.  Usually, the “items” being dropped are new cryptocurrency or NFTs for use by the recipient.

What is a cryptocurrency airdrop?

Usually, it is a tranche of new cryptocurrency or NFTs for the use of current cryptocurrency holders.   It is kind of like a dividend within the stock ecosystem.  In this case, the Board of Directors would deem that “Each owner of our stock as of 9/30/20xx shall receive a dividend of $.60 per share owned.”  The airdropping of cryptocurrencies would be distributed in a similar way, but, instead of going to physical addresses, the “checks” are written to the various wallets that have already purchased their currency.

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.

Nuts and bolts-wise, these airdrops are pretty simple.   The investor signs up to apply for the airdrop.   In the process, they have to give a public key to their cryptocurrency wallet (recall, money can only be contributed with this key.)   They might also have to give other details to prove that they are indeed owners of the original currency, as of the effective date of the airdrop.    Then, the details are verified with the exchanges involved, and the cryptocurrency is disbursed.

Are there different flavors of airdrops?

There are several different types of airdrops.  The bounty airdrop is in response to a user doing something to further the project of the coinage.  Perhaps they have to post to Facebook with 5,000 or more friends, or post twice to LinkedIn about the coinage.    The user has to provide proof that they have completed the task, and their wallet address, and the coins will be airdropped to them.  The exclusive airdrop sends cryptocurrency to only a few wallets.   This appears to be the most like a stock dividend as it goes exclusively to people who have held the coins since a certain date.  Holder airdrops require that a user hold a certain amount of coins at a precisely set time and date.   At that exact time, if the user has a qualifying amount, they will be airdropped a certain amount of new tokens.

Why might there be an airdrop?

Well, let’s hearken back to the stock example.  The Board of Directors want to see that a spin-off corporation is seen in a popular light in the investing world.   So, all of the investors of ABC corporation on a certain date would receive several shares of 123 corporation, their spin-off.   The founders of a cryptocurrency might want to start an even newer currency that has features not seen in the old one.  So, at this “hard fork” they distribute a quantity of the new currency to holders of the original currency.  The other reason is to promote a new cryptocurrency.   News of the airdrop is publicized and the value of the currency (hopefully) increases.

What are the Pros and Cons of airdrops?

Opportunity to receive new cryptocurrency for FREE!!Airdrops can be exciting!  Will the new currency be the one to challenge Bitcoin?   Nobody knows, yet.
Can learn about blockchain technology and investing.This is the olde “learning by doing” trope.   To be certain, it is an effective way to learn, but it might be an expensive one, in the end.
Opportunity to participate in a new cryptocurrency project from the ground level.Let’s say that GeoCoin was started to fund agriculture projects.    The governing board decided to start another project to save the oceans, and have an ICO for AquaCoin.  (Hopefully there will be no liquidity problems.)
Some cryptocurrency airdrops have special requirements.Some cryptocurrency wallets might not accept the currency being airdropped.  Further, to get the airdrop, the recipient may be obligated to do something like write a positive article pertaining to the new currency.
Scams are abundant in the airdrop literature.Scammers desperately want to get those private keys to drain wallets.   What better way than asking for the Public ones, and hopefully some get confused and use their Private one too.
Proceeds from cryptocurrency airdrops are Taxable.Beware that the airdropped currency will be taxable.  Dividends are taxable, so this is not too surprising, I hope.

How might airdrops be a kind of scam?

These scams are most often executed thru a decentralized exchange, DEX.   The person is sent to a site that looks very much like the DEX, when in reality, it is a site controlled by the scammers.  In this way, their entry of both Public AND Private keys can be witnessed.  Then, the scammers go to the real site, and drain a very real wallet.

What can I do to avoid these scams?

Few things:

  1.  You always have a right not to receive the airdrop.  Don’t apply for one, and you cannot be vulnerable to this scam.
  2. Be wary of airdrop tokens received from an unknown source. It is highly likely these unsolicited tokens are part of a phishing campaign.
  3. Do not visit or connect self-custody wallets to any websites advertised by airdropped tokens through error messages, token names, or other methods.
  4. Do not interact with airdropped tokens (e.g. approving, transferring, swapping, etc.). As annoying as it sounds, it’s best to just leave them sitting in your wallet.
  5. Do not hold high value assets in the same wallet used to regularly interact with Dapps. Use cold storage or custodial solutions such freely available Coinbase Vault or Custody.
  6. Make sure to confirm the legitimacy of the project before claiming an airdrop. You should be particularly careful when it requires you to connect your wallet to an airdrop website.
  7. In an announcement of an impending airdrop, look carefully for broken English and mis-spellings.
  8. Before receiving an airdrop, do your research and go to the project’s website and confirm that they are executing an airdrop.   If you are still not sure, think carefully whether it is worth the risk or not, to receive the airdrop.
  9. You might want to think about setting up a special wallet with the sole purpose of receiving airdrops.  Once received, this can easily and securely be transferred to another wallet.

The Verdict

The airdrop can be a really effective way to reward ownership or perpetrate a fraud.   Think on it: It is quite literally ETH or BTC falling from the sky.   These are unanticipated by the recipient, yet welcomed by them.  On the other hand, in order to receive this “mana from heaven” the over-eager potential recipient could pretty easily be fleeced, and tricked into giving up valuable identifying information.  If people are airdropped currency, they should quickly check and make sure that the airdrop is not a bogus attempt  to trick them into giving up valuable information to be used by an unethical hacker.  Once again, the price we pay for such  great potential benefit is eternal vigilance.                                                                                                                                                                                                                                                                                                                             






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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