What is an ICO?

In CNBC’s last feature, we explained what the blockchain is. Many start-ups are now building entire businesses on blockchain technology. But instead of turning to public stock markets or venture capital to fund their company, businesses are turning to cryptocurrencies.

In the past year-and-a-half, the so-called initial coin offering (ICO) has been on the rise. It’s a new method of funding for start-ups in which new digital tokens or coins are issued. That’s what we mean by tokenization.

There are over 1,000 digital tokens in existence, and this article will explore how an ICO works and how entrepreneurs are trying to tokenize business.

An initial coin offering is essentially a fundraising tool. Firstly, a start-up can create a new cryptocurrency or digital token via a number of different platforms. One of those platforms is Ethereum which has a toolkit that lets a company create a digital coin.

Then the company will eventually do a public ICO where retail investors can buy the newly-minted digital tokens. They will pay for the coins with other cryptocurrencies like bitcoin or ether (the native currency of the Ethereum network).

Unlike other fundraising methods such as an initial public offering (IPO) or even venture capital, the investor doesn’t get an equity stake in the company. If you buy shares in a public firm for example, you own a small slice of it. Instead, the promise of an ICO is that the coin can be used on a product that is eventually created. But there is also hope that the digital token will appreciate in value itself — and can then be traded for a profit.

ICOs raised $3.8 billion in 2017. But already so far this year, companies have raised in excess of $12.4 billion, according to CoinSchedule, a website which tracks the data.

Here’s a list of the biggest ICOs ever.