Airdrops and IPOs – Bitcoin Market Journal

Imagine for a moment that OpenAI goes public.

Additionally, imagine if all early users of OpenAI’s flagship product, ChatGPT, received special benefits. Free sharing from OpenAI When IPO.

Even people who have never owned a stock in their life will join ChatGPT to get free OpenAI stock. Easy decision.

Now imagine this idea becoming popular. All AI companies In the future, we may offer “free stock.” There are thousands of AI platforms. You only need to create an account on each platform and use it once to qualify.

Every AI startup will get an initial influx of users, but they have to question whether they are “real” users. Will they come back? And will they sell the stock immediately after the IPO, driving the price down forever?

And users have to question whether the effort is actually worth it. In the end, using all these AI platforms for potential stakes is a great way to learn about them, but it requires a lot of work.

What I described is what happened in the cryptocurrency industry. airdrop.

Stocks vs Airdrops

Airdrops are a cryptocurrency solution for the SEC.

Since it is illegal to sell a company’s shares outright without registering with the SEC, the industry has created “airdrops” that reward early adopters of cryptocurrency “companies” with free tokens.

As expectations grow for cryptocurrency companies that “might airdrop,” they attract more users and gain more momentum. When the token launch finally occurs, all early users will be rewarded with tokens.

You can then immediately sell those tokens on a decentralized exchange, creating an overnight market for the new token. (No NASDAQ required!)

It’s like owning stock in a company, with a few important differences.

That last part is important. In both models, the founder becomes rich.

I know you were worried about this. If an IPO is a way for founders to cash out their shares and buy a house in the Hamptons, how do the founders of cryptocurrency companies get a home to match? And how do cryptocurrency companies continue to operate?

Do not worry. Most of the tokens will be “reserved” (or airdropped) to the founders, a sort of company treasury that can be sold to pay future company expenses.

Since the U.S. Congress has not better defined how cryptocurrency companies operate, we have a strange workaround that works like an IPO but without any oversight or regulation. Contrary to what the SEC is trying to achieve.

And we must question this model. Are airdrops good for the industry??

Create marketing buzz with airdrops

Airdrops are effective at attracting new users, especially for cryptocurrency companies that already have some traction.

The airdrop works as rumored. “Anyone can participate in the airdrop” is code for “Sign up for an account now and get free stocks.”

However, since the airdrop ends once the token is released, all users may dry up and be cashed out, never to be seen again.

This results in airdrop users being of much lower quality than real users. They are in it for the money.

From a cryptocurrency company’s perspective, they are simply paying for early users. There is no problem here. In marketing, this cost is called cost per customer (CPC). However, with airdrops, you pay by diluting your company’s shares.

And airdrops seem to be effective in increasing the influx of early users. This will increase the initial token price, helping you get a house in the Hamptons.

To put it less cynically, airdrops are a powerful incentive to build products that: people actually want, so early users will keep coming back. if they really Trust your company. Maybe you’ll even end up holding some initial tokens.

IPO creates owners

But let’s contrast airdrops with the traditional IPO model, where shareholders are rewarded. invest in your company. Shareholders are literally owners, so their incentives are aligned.

It is clear that shareholders are better users than “airdrop hunters.”

While airdrop users bought stocks over time, shareholders bought stocks with money.

This is why the IPO model is better for the company, the market, and society as a whole. However, doing an IPO is very costly and inefficient.

This is why many cryptocurrency companies do not want to do this. Especially when you can get similar results for less money.

Ultimately, for most investors, owning tokens in a cryptocurrency project appears to be the same as owning stock in a company. The difference is that now you are rewarded for early usage instead of purchasing tokens after launch.

Both models have pros and cons. but It would be great if there was a way to legally conduct a blockchain IPO with significantly less cost and bureaucracy than a traditional IPO.. This is where Congress must get its act together.

Are airdrops legal?

Airdrops are designed to circumvent securities laws. Because the tokens are provided for free (rather than sold at the initial token launch), they are supposedly exempt from SEC oversight.

As Bloomberg Law points out, this may not be true.

If the SEC eventually decides to proceed with a cryptocurrency airdrop, you could kiss those token prices goodbye. And the airdrop market is likely to dry up overnight.

Fortunately, the SEC exists to protect investors, so it’s the companies they go after, not the token holders.

For investors, “airdrop farming” is generally safe, but the usual potential for fraud and hacking still exists, especially when interacting with lesser-known cryptocurrency platforms.

If you have the time and interest, airdrop farming on a reputable platform can also be viewed as an educational investment. (Eventually you will do Learn something even if there is no airdrop.)

However, your time would be better spent as a hobby rather than viewing farming as a full-time job. This is because farming, and even airdrop farming, takes a lot of work. That’s why they pay you to do it.

If Congress updates the securities laws to provide more clarity about cryptocurrencies, it will be possible to legally purchase shares of cryptocurrency companies like IPOs, which is what most of us really want. And finally we can drop the airdrop.

Health, wealth and happiness,

John Hargrave

publisher, Bitcoin Market Journal

Thanks to Bryon Gilliam for his excellent newsletter, which inspired this column.