Everything You Need to Know About Airdrops, Hard Forks, & ICOs
Basic Returns vs. Premium Returns
Although investing in cryptocurrency looks complicated to the untrained eye, it is astoundingly simple. Too simple, in fact.
Here’s a real life example.
One of my friends bought $1,000.00 of Ethereum (ETH) at the start of 2017. When he wanted to calculate his earnings for that year, he looked at how much prices had changed over the course of 12 months.
A quick bit of arithmetic showed he had made $91,620 in profit. This is a jaw-dropping return by any standard, but here’s the kicker — he actually underestimated his own returns.
You see, cryptocurrencies have hidden properties — airdrops, hard forks, ICOs — that may boost their long-term value. Last September, Ethereum had an air drop that could have added upto $77,890 to my friend’s earnings. But his simple view of investing in cryptocurrency ignored these hidden riches.
Even so, my friend was lucky. Despite his ignorance about airdrops and hard forks, he still walked away with his pockets full. But imagine if the situation were slightly different. Imagine that Ethereum prices had stagnated rather than skyrocketed.
Would my friend still have invested? Probably not. He would have thought it wasn’t worth his time, and as a consequence he would have lost out on a small fortune.
Why Does No One Talk About Airdrops?
Initial coin offerings and hard forks are well known. In 2017, there was a minor ICO craze after investors first discovered them, and hard forks slipped into the ether when Bitcoin Cash split from Bitcoin.
Very few people understand them, of course, but at least you can articles about them in financial media. Airdrops, by contrast, are virtually unknown. Why?
That’s a hard question to answer.
One explanation is that cryptocurrencies are relatively young. Investors have not had enough time to study their eccentricities, nor have analysts had much time to communicate their technical aspects in normal language.
Another is the business of news. Mainstream outlets are incentivized by Google and Facebook to publish clickbait rather than nerdy stories about airdrops. But it hardly matters.
Regardless of why investors are ignorant of these subtleties, it’s important for them to understand these features. Can you imagine widespread ignorance about share buybacks or dividends? It’s inconceivable!
With that in mind, let’s jump into the details.
What are airdrops, hard forks, and ICOs?
For the benefit of those who are unfamiliar with these terms, I’ve included a list of working definitions below. Underneath each definition is what I’d consider an equivalent event in the stock market. Hopefully, that will illuminate how these forces affect cryptocurrency returns.
Airdrops are essentially free handouts of cryptocurrency. They occur when a blockchain startup is looking to gin up attention their new token.
Stock Market Comparison: Mergers.
When one public company buys another, investors can either receive a payout or equivalent shares of the buyer’s stock. Theoretically the merger is supposed to create extra value, thus increasing the value of the stock.
Likewise, the idea that airdropped tokens have value rests on the assumption that you can sell them to willing buyers.
Hard forks occur when a blockchain splits in two. These forks often result in airdropped tokens, although it’s important to distinguish between the two terms.
Why? Well, because hard forks suggest internal conflict among the blockchain’s developers. Two factions that cannot agree eventually lead to one group splintering off from the other, thus creating a second cryptocurrency.
Stock Market Comparison: Share Buybacks.
This comparison is a bit of a stretch, but the Bitcoin/Bitcoin Cash fork resulted in investors getting another $200.00 airdropped into their wallets. In a way, this is like a company deciding to return cash to shareholders.
Sure, investors get a sudden infusion of new money, but it’s a bittersweet because it means that company is not investing in research, development, or acquisitions. It isn’t growing, in other words.
INITIAL COIN OFFERINGS
Initial coin offerings (ICOs) offer startups an alternative way to raise money. Rather than begging venture capitalists for table scraps or going public via an initial public offering, startups can simply issue their own cryptocurrency.
This offers tremendous upside to the startup, since they forfeit no equity in the company. However, they need to ensure the token offers some value or else investors and regulators can take legal action.
Stock Market Comparison: Direct Listing.
In the first quarter of 2018, the music streaming service known as Spotify filed for a direct listing on the New York Stock Exchange. This means that Spotify will circumvent the normal process going public, such as wooing institutional investors and paying investment bankers outrageous fees.
It is a bold move that removes the middlemen of finance, much like an ICO.
Let’s Talk About Risks and Rewards
In terms of outcomes, the upside potential of airdrops, hard forks, and ICOs is well established. Consider the following examples.
Stellar Lumens (XLM) airdrops 16 billion tokens. If you had been holding Bitcoin on June 26, 2017, you were eligible to claim free money that Stellar Lumens would airdrop into your account.
The good folks at Stellar say that “Bitcoin acted as a profound inspiration” when they were creating their cryptocurrency, and that’s why they want to share the love. Whatever their reason, the important takeaway is that XLM coins appreciated by more than 1,000% from then to the end of 2017.
(Sidenote: Bitcoin holders could only claim the same percentage of the airdrop that they owned of the total Bitcoin supply. So, if they owned 0.002% of all Bitcoins in existence, they could only claim 0.002% of the air drop.)
Bitcoin Cash (BCH) forks off Bitcoin (BTC). In August 2017, a group of dissident developers broke off from the Bitcoin community, splitting the blockchain in two.
This hard fork resulted in every Bitcoin holder getting Bitcoin Cash tokens at a rate of 1-to-1. At the time, the price of one Bitcoin was $2,750. By comparison, BCH traded at approximately $200.00, although it would later skyrocket by more than 2,000%.
Anyone holding Bitcoin at the time of the hard fork would have received this unexpected boon.
Golem (GNT) becomes a golden goose. One of the earliest high-profile ICOs was held by Golem on November 10, 2016. This startup gives everyone access to immense processing power by connecting them to a network of computers around the world.
The only catch is you pay for those resources by way of GNT tokens. What this does is effectively put the idle computing power of the world to good use. Investors thought this was a solid business plan, so they went long on GNT.
Those that did would have made more than 3,000% returns by the time this article went to press.
So what are the risks?
One, regulators will decide these are financial products which need to be overseen and taxed. Two, someone is scamming you.
Both risks are pretty serious.
China and South Korea have banned ICOs already, proving that regulators are capable of coming down hard on the industry. The European Union, meanwhile, demands that ICOs meet anti-money laundering and anti-fraud compliance regulations. Canada deems them securities. The U.S. is similarly tough, and many other places have not yet established rules, but are in the process of doing so.
With all this regulation coming down the pipeline, it’s easy to forget why regulators are worried. Namely, that cryptocurrency scams are dime a dozen.
From pump and dump scams to price manipulation, the industry is overpopulated by bad-faith actors looking to take prey on retail investors. So even while the upcoming regulation is burdensome, it is necessary for the industry to succeed.
Verdict: Big Cryptos Are Often The Best
Some readers might rush off to invest in small, unknown ICOs after reading this report. That would mean I failed to communicate the dangers of ICOs or that they did not grasp the significance of airdrops. The same goes for hard forks.
Building an investment strategy around these features is a high risk, high reward approach. But airdrops, on the other hand, are a relatively risk-free way to line your pockets. That said, the million dollar question remains: Which cryptocurrencies are best for airdrops?
My advice is to go Big. Airdrops benefit larger cryptos, such as Ethereum and Bitcoin. Not the no-name cryptos with $100,000 in market cap. Here’s why.
The purpose of an airdrop is to gain attention by leveraging the liquidity of a popular cryptocurrency. OmiseGO and did not search through the bargain bin for its airdrop destination — it chose Ethereum, in the same way that Stellar Lumens chose Bitcoin.
I want you to remember this, because cryptocurrencies are built on shifting sands. Some of the crypto — most of them in fact — might not be around in a few years. The ones that will, however, could be worth a fortune.
Disclosure: This research report was commissioned by a professional services firm eager to understand more about the cryptocurrency space. However, all opinions and analysis expressed in the report belong to the author.