Crypto ‘Airdrops’ Rain Down Money for Nothing Amid ICO Scrutiny

(Bloomberg) -- When Michael Terpin peered inside his cryptocurrency wallet recently, he found several new coins -- ones that he didn’t buy.

“Every week someone is dropping me a buck or two of something,” the San Juan, Puerto Rico-based investor and organizer of crypto conferences said. So far this year, Terpin estimates that he has received 15 free digital coins in one of his digital accounts that are referred to as wallets.

While the vast majority are likely worthless, the hope is that coins distributed to people who own older tokens, answered a survey or registered to receive information turn out to be the next Bitcoin. Known as airdrops, the giveaways are being embraced by startups seeking to broaden ownership and raise the profile of blockchain projects as the universe of more than 1,600 bigger coins and thousands of smaller ones faces increasing regulatory scrutiny.

Crypto ‘Airdrops’ Rain Down Money for Nothing Amid ICO Scrutiny

Some have proved to be lucrative. Stellar distributed billions of Lumens to Bitcoin holders last year, and each one of those is now worth about 38 cents. OmiseGo had an airdrop in 2017, helping to boost the value of its token.

While growing in popularity, the idea isn’t new. In 2010, pioneering developer Gavin Andresen created the Bitcoin Faucet, which gave out five coins to people who’d downloaded Bitcoin software to spur its adoption. They’re worth almost $45,000 today. The practice could be classified as a gusher now. More than 2,500 different coins that aren’t as widely followed have been airdropped in the last 12 months, according to AirdropAlert.com.

Startups are resorting to airdrops as the Securities and Exchange Commission raises questions over whether tokens from initial coin offerings, the preferred fundraising method of many companies in the past year, fall under the agency’s scope of regulation. The thinking is that because airdrops don’t raise funds, they could face lower hurdles in compliance. That said, airdrops could be viewed to be similar to free stock giveaways which, the SEC said in 1999, still need to comply with securities laws.

The bigger risk for free-money-searching consumers is that airdrops are downright scams. Many sites warn users against giving anyone their private keys -- essentially, passwords to their digital wallets -- to receive free coins.

Still, many have proven to be effective. The airdrop of eosDac has been credited with boosting the value of EOS lately by double digits. Another startup, esports-focused eBoost, for which Terpin is an investor and a public-relations representative, said it will do an airdrop on May 25 even though it raised enough funding, including through its ICO in 2015.

"You kind of think of it as a stock split," said Marshall Long, chief gaming director of eBoost. The company’s Telegram group has already grown 20 percent since the announcement of the airdrop, to 1,500 people, he said, while its Discord server -- another chat option -- is up by 4,000 to 40,000 people, he said.

But keep in mind that while splits often make the price of a stock more attractive in the minds of many equity investors, they don’t change the underlying value of the company. In the case of airdrops, you’re often just getting another coin that doesn’t give you any equity in the enterprise.

"My sense is it’s a fun idea, but probably short-lived for value,” said Dave Balter, partner at Flipside Crypto, which runs investment clubs for cryptocurrencies.

©2018 Bloomberg L.P.