The idea of Initial Coin Offerings, ICOs in cryptocurrency is quite similar to Initial Public Offering for stocks. You are purchasing an early stake with the hope of future gains.

It came about as a way of funding new projects through the pre-sales of coins or tokens to investors that express interest in the project. The brains behind the project startup would have to present a whitepaper which includes details of the business model and the project’s technical specs before the ICO.

Next, they have to give a timeline and how much they intend to raise from the Initial Coin Offerings, how much coin they intend to keep for themselves, and how much coin will be released. Finally, the investors get to purchase tokens using already established cryptocurrencies such as Bitcoin and Ethereum.

The major difference between ICOs and crowd funding is that, investors buy the coins with the hope of selling for a possibly higher price in the future. Where as in crowdfunding, the investment is considered to be a donation.

The History of ICOs
It all started back in 2013 with J.R. Willet’s Mastercoin campaign. He gave investors the opportunity to support the project by sending Bitcoins to a special “Exodus Address” and receive Mastercoin tokens in return. About 500 people invested 5000 Bitcoins on the project which was conducted entirely P2P. This inspired a lot of projects who used Bitcoin blockchain for the same P2P crowdfunding.

A year later, Ethereum came along with the same idea of using Bitcoin Blockchain, and successfully raised $18 Million in Bitcoin within four weeks. This broke all crowdfunding records. What’s more, the Ethereum block chain simplified the process of issuing tokens, thereby paving way for other record-breaking ICOs in 2016 and 2017.

Regulation of Initial Coin Offerings
ICOs lack any form of government regulation or community standards. This is probably why uneducated investors are so skeptical of it, and rightly so. In fact, ICO was setup to depend completely on the brains behind the blockchain project until recently.

If it’s so risky, why do people invest? According to critics, investment in ICO is based purely on “fear of missing out” rather than an objective investment decision.

However judging by the recent SEC statement regarding The DAO, including China’s ban on ICOs, it appears government regulation is just around the corner.

Types of ICOs
Developers have enjoyed the freedom of running their ICOs how they see fit. This is due to the lack of regulation we discussed earlier. The different methods in which this campaign has been set up in the past makes it impossible to review all the types of ICOs.

However, we use the pricing mechanisms used by these developers to divide the types of ICO into four. Here they are;

1. The Price Increases During ICOs
After setting a fixed exchange rate for the token, there is every likelihood of the rate rising with time. The implication of this is that those who invested earlier and took the biggest risks got the best price per coin ratio and they get make the highest profit from the initial coin offering.

2. The Price Decreases During ICOs
This Dutch auction method of Initial Coin Offering was first presented by the Gnosis team. Here is how it works; the sales begin at the highest price per token. This price proportionally decreases till the auction ends.

3. The Price is Fixed During ICOs
Investors get to purchase as many tokens as they want without worrying that the price would rise. This method is especially useful to large investors who don’t have worry about purchasing a large amount of token to influence price. There is usually a cool-off period after this type of ICO. Investors are not allowed to trade their tokens till the period ends and the project is listed by exchanges.

4. The Price is not determined During ICOs
This brings us to the last type. The developer gives investors to invest in his start-up only to distribute the token the token based on the amount invested. For example, in the EOS token sale, the money invested was totaled and divided by the number of tokens available. This is how the price was determined. The implication of this is that, if there’s just one investor, that person will get all the tokens.

Where Are the New ICO Tokens Stored?
When tokens are issued by the startups to investors, they usually create and track it as the intrinsic token of a completely new blockchain. An example is Ethereum, which was funded by a simple exchange of ETH tokens funded wallet for BTC.

Alternatively, the token can be created and tracked on top of an existing blockchain. It can either be as a Colored coin that exists on Bitcoin’s blockchain or exist on Ethereum’s blockchain as a token that’s held in smart contract.

What Do Investors Expect from an Initial Coin Offering
There are two primary things investors expect form an Initial Coin Offering. These are;

1. Profit
Profit. Investors expect that if a particular project is successful, there’ll be an increase in the value of the tokens they purchased. Then, the tokens could be sold for a tidy profit.

2. Liquidity
Investors also expect that the tokens they purchased would eventually be listed on cryptocurrency exchanges. This makes it possible for them to sell on the secondary market and make even more profit.

Bottom Line
In a bid to avoid legal issues, there is a disclaimer often associated with tokens which suggests that tokens are not investments or securities, simply donations. Yet, the use of the phrase Initial Coin Offering -ICO, which sounds a lot like Initial Public Offering (IPO) gives the impression that it is.

ICOs have failed in the past, there are also ICOs where the price of the token remained stagnant. The investors couldn’t make their money back. The lack of regulation makes it even more scary for some folks.

However, for the few that constantly take the huge risk of buying large number of tokens with the hope that the value of the asset will rise, the ones that invest knowing they can lose all their money, Initial Coin Offerings are always worth the risk.