ICOs vs. Airdrops
You've been researching cryptocurrencies for a bit now and you think you might be ready to diversify into less established coins, but you're wondering how to choose which coin to pick. Keep reading to learn about the various frameworks that currently exist for the distribution of new coins.
Odds are, you've run across a plethora of open "ICOs" ("initial coin offerings"). As an "ICO" sounds similar to an "IPO" ("initial public offering" for the sale of securities of publicly traded companies), you might be inclined to trust the legitimacy of such an offering, but pitfalls are rampant and the unwary might lose their shirt by investing too much in the wrong ICO. That said, ICOs can also be a great investment opportunity. In order to invest in an ICO, you'll need to send some sort of coin (one of the ICO's accepted trading pairs) to a specified wallet address.
ICOs are extremely speculative and should be approached with extreme caution and care. Always read the associated "white paper." You are also heavily encouraged to browse forums like Reddit and Bitcointalk to see if other #cryptoheads can assist you in your analysis. Exploring forums also gives you the opportunity to gauge the strength of the coin's community, which is important if you expect the coin to ever become widely-adopted.
Usually, to participate in an ICO, you'll need to send the coins from the address you intend to use to receive the tokens you are entitled to in exchange for your contribution of ETH/BTC/LTC, etc. The author once made the mistake of sending ETH from a Coinbase account to an ICO address (spoiler: it doesn't work and, to my knowledge, there's no way to reverse the transaction). You'll usually want to use an ERC-20 compatible token wallet (we recommend MyEtherWallet or MetaMask online wallets; make sure you read their instructions and backup your wallet and private key(s) appropriately). Note that an ERC-20 wallet will only work for tokens on the ETHEREUM network. If the coin runs on a different script, ERC-20 tokens will be useless and you will lose your money. ALWAYS READ THE ICO INSTRUCTIONS CAREFULLY!!!!!!!!!
If you want to invest in ICOs but don't know where to find them, check out ICO Alert for an up-to-date calendar of most/all ICO offerings (both ongoing and upcoming).
Often, ICOs offer presale bonuses (I've seen anywhere from 10% bonus to 70% bonus). Keep in mind that, while bonuses do sound nice, they can sometimes harm the cryptocurrency's ability to grow because the early buyers who got the bonus are have incentive to sell the currency at a profit the second it goes live on exchanges, which can sometimes cause the price of a token to swan dive.
Traditional Model of Distribution
You might think an ICO is the only way new cryptocurrency coins are distributed, however, this is not true. In fact, some of the most well-known coins today never had an ICO. Some examples of coins that did not utilize an ICO include: Bitcoin, Ethereum, Litecoin, and Monero. These coins chose instead to rely on stable community growth, miners, and a confluence of other factors to make their coin marketable. While a non-ICO method of coin distribution has worked for the cryptos listed above, there are plenty of coins that have attempted something similar but which have failed miserably and now represent "dead" coins.
In a variation of the traditional distribution model expounded above, it is also possible for a coin to be distributed via airdrop. Airdrops are a really cool way of distributing coins.
Essentially (the following explanation can vary substantially and is only meant to help you conceptualize how an airdrop works), airdrops reward early adopters and have the potential to be extremely anonymous. The specific procedural details of participating in any given airdrop will vary substantially between cryptocurrencies, but you can generally find the rules on the crypto's website. For an example of Airdrop rules, check out the DeepOnion Airdrop Rules (last accessed Jan. 24, 2018; unsure if link will stay live after airdrop period ends in about 11 weeks).
Usually, the first-step in participating in an airdrop (aside from possible registration requirements) is to get some coins. If the coins have been premined, you will probably be able to get the coins on an exchange or through the coin's website. In order to get coins, you'll need a wallet address for the coins to be sent too. Usually, for new coins, you'll want to use the coin's specified QT (desktop) wallet as it will be difficult to find any third-party support for a brand new coin (third-party support comes as the project matures).
Once you have a wallet address and the coin-creators know where to send future airdrops, you simply need to maintain eligibility for the airdrops to benefit. Usually, the amount you receive from an airdrop will be in proportion to the amount of coins you are currently holding in your QT/desktop wallet (especially if the coins use a PoS system instead of or in addition to a PoW system of verifying transactions). For example, DeepOnion benefits early supporters by providing an added distribution to people with 10,000 tokens or more in their wallet (as a way to secure the system).
One of the neat (likely intended) effects of airdrop-style distributions is the ability to quickly increase the coin's per-coin price. Because airdrops have the potential to increase one's coin holdings exponentially during the duration of the airdrop period, people tend to hold the majority of their coins so that they can acquire even more in the next week's airdrop. This "hodling" incentive is good for helping the coin stabilize so that new investors aren't scared off by unacceptable levels of price volatility.
As with anything in the crypto space, be wary before investing. That said, DeepOnion was my first airdrop style coin and I've been thoroughly impressed with how the system has worked.
So Which Distribution Model Is Best?
While past-performance is NOT an indicator of how the future will shake out, I personally prefer the traditional model of distribution and the airdrop model of distribution over the ICO model. That said, I've invested in both the Lamden (TAU) ICO and the Tokia ICO (still open until Jan. 31, 2018) and have thus far had strong returns.