Want free cryptocurrency? 'Airdrops' is coming

Key Points
  • In an "airdrop," makers of a new digital token give it out for free to some owners of existing coins.
  • "In certain ways people are getting free lottery tickets," says Matthew Roszak, co-founder of Bloq.
  • William Mougayar, blockchain investor, says airdrops are being misused. "Sadly, airdrops are the new spam mail or coupons junk mail."
Want free cryptocurrency? Look out for 'airdrops' in 2018
Want free cryptocurrency? Look out for 'airdrops' in 2018

Digital currency developers are trying a new tack for marketing and encouraging mass adoption: "airdropping" free cryptocurrencies into people's accounts.

The meaning of airdrop in the cryptocurrency world has little to do with an iPhone. In this case, a group of people starting a new digital currency decide to give these newly minted tokens to holders of an existing coins like bitcoin or ethereum, for free.

"In certain ways people are getting free lottery tickets," said Matthew Roszak, co-founder of enterprise blockchain-technology company Bloq. "There will be a tsunami of airdrops this year."

Earlier this month, holders of the cryptocurrency neo were selected to receive another digital coin called ontology, for free. The token is supposed to give holders voting rights for a platform that focuses on identity verification and data services. Ontology began trading on Hong Kong-based exchange Binanceon Wednesday, according to a release.

Three other teams — including developers behind a Wikipedia-like site called Everipedia, similar to the ethereum's Callisto Network, and a smart-contract system called United Bitcoin — are also planning airdrops, according to Fundstrat Global Advisors.

But given the price surges and mania around cryptocurrencies, it isn't clear why anyone seeking a profit would give away these out these new coins.

Here are a few reasons more digital coin developers are pursuing airdrops:

1. Promotion

Digital coin developers are using the airdrop method to promote new projects instead of "spending money on billboards and T-shirts," said Roszak, who is also chairman of the Chamber of Digital Commerce.

The ontology airdrop said it would distribute 20 million coins, or about 10 percent of its tokens, to neo holders. Both coins were created by the Chinese company OnChain. For every one neo, investors could get 0.2 ontology tokens, according to the Neo Council, an advisory group.

In order to implement an airdrop, the maker of a new coin can look up and offer all of the holders of one cryptocurrency, such as bitcoin, a chance to receive the up-and-coming token for free.

The coin isn't necessarily automatically distributed, but users can opt in to participate in the airdrop.

"We're seeing it through [digital token sales] and smaller start-ups that are trying to get traction right away," said Shone Anstey, executive chairman, president and co-founder of Blockchain Intelligence Group.

The overall trend of being able to get some new digital coins for free through public blockchains "shows the great utility of the public networks," Anstey said.

2. Mass adoption

Cryptocurrency enthusiasts often tout the technology's transformational power that will come once there is widespread use. But despite growing interest in digital coins, adoption remains a fraction of the population. Airdrops try to address this issue.

"I think we'll see airdrops as an increasingly sophisticated approach to customer acquisition," said Spencer Bogart, partner at San Francisco-based Blockchain Capital.

"Slipping money into someone's pocket is a powerful way to get their attention," Bogart said, adding that the airdrop process could spur mass adoption of a new cryptocurrency better than an initial coin offering.

ICOs are sales of new digital tokens to raise funds for projects based on blockchain technology. By owning a token, investors potentially get access to a platform such as a cloud storage system, and may benefit from the token's price gains. ICOs have raised about $7 billion to date, according to Autonomous Next.

But it can be a challenge for an ICO to reach enough potential investors. In the five months through November, less than a third of ICOs reached their fundraising targets, according to TokenData.

"When you give something to someone for free they will pay a little more attention than if you ask them to sign up," said Erik Voorhees, CEO of ShapeShift, a platform for trading digital tokens. "Imagine if Walmart could put some kind of asset into everyone's bank account in the U.S."

Another potential benefit of airdrops is less regulatory uncertainty than an initial coin offering.

China has officially banned the token sales, while the U.S. Securities and Exchange Commission has stepped up its efforts to stamp out fraudulent ICOs. Many cryptocurrency companies have received subpoenas or information requests from the SEC, CNBC reported last week.

3. Price

Developers may also have an incentive to use airdrops as a way to drive up the price for an existing coin. The demand for that original cryptocurrency could go up as investors buy it just to be a part of an upcoming airdrop.

That's similar to how many investors piled into bitcoin ahead of its split into bitcoin and bitcoin cash last summer, in order to benefit from a similar method of giving investors new coins called a "fork."

In a Feb. 22 report, Fundstrat Global Advisors highlighted upcoming forks or airdrops in cryptocurrencies such as neo, ethereum classic, zclassic and litecoin.

"We think these upcoming forks and airdrops may be a short-term reason to focus on these tokens," the report said. The firm's analysis also found that between the beginning of January and the end of February, five coins posted double digit returns relative to bitcoin.

However, their data did show that four other coins with upcoming airdrops or forks underperformed bitcoin.

The airdrop phenomenon is also still "fairly fringe" and "won't affect the price," said Blockchain Intelligence Group's Anstey.

Other analysts are also skeptical that the trend helps boost public awareness.

"Airdrops are being misused and abused, to the point where they are starting to lose their intended effect," William Mougayar, blockchain investor and author of "The Business Blockchain," said in an email.

"The more scammy and over-promoted ICOs will tend to send airdrops liberally without a proper user opt-in authorization," Mougayar said. "Sadly, airdrops are the new spam mail or coupons junk mail. They are hit and miss on benefits."