People are raising hundreds of millions selling digital coins online — it's either the future of funding or a 'bubble'

Startups around the world are raising hundreds of millions of dollars by issuing new digital coins, a trend that has made people both excited and concerned.

Over half a billion dollars has been raised through so-called "Initial Coin Offerings" (ICOs) since the start of the year, according to Richard Kastelein, a partner at the Cryptoassets Design Group, a company that helps launch ICOs.

It's an incredible amount considering that ICOs were unheard of just five years ago.

The speed at which companies are raising money is turning heads too. Gnosis, a prediction market for digital currency Ethereum, raised $12 million in just 10 minutes in April. Brave, a new web browser startup set up by the founder of Mozilla, made that look pedestrian, raising $35 million in less than 30 seconds selling "Basic Attention Tokens" last month.

"The space itself started heating up in the back end of last year," says Jan Isakovic, the CEO of new ICO platform Cofound.it. "It really caught fire since April of this year. We believe this is only going wider and wider."

'We’re selling tickets to a movie but still fine-tuning the last third'

To raise money through an ICO, a company issues a new digital currency that can either be spent within its ecosystem, a bit like Disneyland dollars, or used to power part of the business, like the fuel you put in your car.

"The Cofound.it token will be used on the platform by startups applying to join the platform," says Isakovic. His business raised $14.8 million through an ICO last month and is building a platform that to connect ICO-funded companies with experts who can help grow the business.

"They will use token to pay expert evaluations on the platform. If you want to work with the project you have to put a certain amount of Cofound.it tokens in escrow. It’s like an internal currency."

What is unusual about most ICOs — sometimes called Crowdsales — is that, in most cases, the coins being sold are for marketplaces or businesses that have yet to be built. Investors who are buying them are betting that the businesses will become successful and the coins will become more valuable as people flock to the platforms.

"We’re like selling tickets to a movie but we’re still fine-tuning the last third while the audience is filling into the movie theatre," Isakovic says.

He was drawn to ICOs because of an unhappy experience he had with venture capitalists who funded his previous venture, a retail startup called Storesense.

"Unlike with the traditional VC system where you lose six months to a year raising, here you don’t lose any time — the opposite," he says.

"When you get money from a VC you get money from one person or one perhaps their team. Everybody says, 'we have the connections, we will help your startup grow', but that really seldom happens. Whereas with token crowdfunding, you can get thousands of engaged supporters who are extremely motivated to see your company succeed. They are your early adopters, they’re your evangelists."

'They will thaw a lot of frozen capital and lead to a lot of innovation'

Setting up an ICO is relatively easy, with most companies piggy-backing on the Ethereum network. Ethereum is a blockchain-based public system that lets people write "smart contracts."

Isakovic says: "A smart contract is effectively a piece of software, a piece of code. In our smart contract, it says we are selling 125 million tokens, our cap is at 56,000 Ether or something. The crowdsale lasts until the cap is reached or until four weeks is done. Calculate the contribution and then send tokens. It’s two or three pages of programme and Ethereum does everything else."

Ethereum's developers, in fact, carried out one of the first ICOs back in 2014 to fund the project, selling digital currency Ether. Joseph Lubin, one of the people who helped build the network, says ICOs are "the first killer use case for Ethereum, in that they will thaw a lot of frozen capital and lead to a lot of innovation."

"You have a global context of the potential buyers of the token and you have a lot of college kids who have $50 and they’re excited about this technology or a particularly E-Sports project, and they throw $50 into the token," Lubin told Business Insider. "The amount of capital that that will free up to create innovation, to create growth, is amazing.

"On the other side of that equation, [there are] a number of two people [startups] in a dorm room putting together a project that was never going to get an email back from a venture capitalist. But they can permissionlessly VC themselves."