Airdrops & Pulling Liquidity: The Sinister Side of Raising Capital with Crypto
If you’ve ever heard of an airdrop, it’s when a crypto project rewards it’s community by “dropping” token holders a small amount of their tokens to reward them for being early in the project. Airdrops are becoming more and more popular as a way to reward loyal fans and build up a community around a project. If you’re interested in getting involved in an airdrop, there are a few things you should keep in mind.
The real reason projects decide to provide their community with “Free-Airdrops..”
When a project decides to give away airdrops to its community, there’s usually more than meets the eye. Yes, airdrops are a great way to get people interested in your project and get them to hold onto your tokens. But there’s also another reason why projects do this: they’re trying to increase the utility of their tokens.
Airdrops are essentially free money, and who doesn’t like free money? But by giving away airdrops, projects are also increasing the demand for their tokens. And as demand for a token increases, so does its price. So while projects may not be making any money off of the airdrops themselves, they’re indirectly increasing the value of their tokens by incentivizing people to buy them [In order to receive an airdrop in most cases you have to buy & hold X amount of the token being airdropped for a “SnapShot”].
Do you ever notice, the day of the “Free-Airdrop”, the price tumbles? Here’s why..
When a new cryptocurrency project launches an airdrop, the price of the token usually tumbles on the day of the event. While it may seem counterintuitive, there are actually several reasons for this.
First, when a project launches an airdrop, it is typically releasing a large number of tokens all at once. This sudden influx of tokens onto the market can lead to selling pressure and a drop in price.
Second, many people who receive airdropped tokens are not familiar with the project or the token itself. As such, they may simply sell off the tokens as soon as they receive them, leading to further price declines.
Finally, some people view airdrops as nothing more than free money and are not interested in holding onto the tokens for any length of time. This also leads to selling pressure and can push prices lower.
Here’s where things get sinister..
According to a recent study, there have been quite a few crypto projects that take action when money flows into the liquidity pool from all the new buyers [which makes the price go up] and pull the liquidity for their own gain before the community is able to collect their “free tokens”.
There are a few possible explanations for this. One is that people are simply selling their coins as soon as they get them, in order to cash in on the hype around cryptocurrencies. Another possibility is that some projects are selling off their tokens before the airdrop, in order to raise capital.
This means that the owners of the crypto project are pulling out all of the buyers money while the “snapshot” takes place, so by the time you receive your extra coins, there’s a chance you won’t end up with any more money than you started, and in most cases you will end up with less.
The study found that, on average, only about 30% of the money in a project’s liquidity pool is still there when the community is able to collect their airdrop. This means that 70% of the money is gone by the time the airdrop happens.
Not every project does this, but we want you to be aware that this is a common loop hole that we’ve seen becoming more popular for startup projects trying to scrape together liquidity with out having to sell shares of their company or take massive loans from the bank.
“How to make sure you’re playing an airdrop right”
A) Study the fundamentals and find out who is developing the project
One of the best ways to learn about a project is to find out who is developing it. These are the people who are working on it day in and day out, so they know all the ins and outs. Plus, they can give you a good idea of what kind of partnerships and future potential this project has.
B) The key is to get in EARLY
By getting in early on crypto tokens, you can get a head start on other buyers in the market and benefit from a higher potential for return on investment.
C) Take profit before the day of the “SnapShot”
If you’re able to take profit before the team behind the project pulls liquidity, you’ll be in a much better position to buy more of the projects tokens when the price turns around [If you believe in the project].
D) If you really believe in the project, dollar cost average in to the price dips after the Airdrop
When it comes to trying to time the bottom of the market, it is impossible to do so. However, if you dollar cost average into the market, you will benefit from a lower average entry price.
- Dollar cost averaging is an investing technique where you spread your investment into equal increments over a period of time. This technique smooths out the effects of volatility and allows you to take advantage of lower prices.
E) HODL
Once you have a good entry position, don’t sell unless you’re absolutely sure that it’s the right move. Hold onto your investment and wait for the long-term gains. If you see incredible spikes in the market, start taking some profit and dollar cost average out, but not entirely [Always keep some just incase;)]
CONCLUSION
In conclusion, only a small group of people actually make money from airdrops. However, after reading this hopefully you will be one of them. To increase your chances of making money from airdrops, be sure to research the project thoroughly and only participate in airdrops for projects you believe in. Good luck!
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*NONE OF THIS WRITE UP IS FINANCIAL ADVICE BTW*
Article by: CEOMODE
