Hard Cap vs Soft Cap: A Quick Guide to Evaluating ICOs
Key Questions Answered
In order to evaluate the Initial Coin Offering (ICO) of a project or protocol, investors and users must take a number of factors into account before considering a purchase. The most prominent ones are the hard cap and soft cap of an ICO. While a soft cap is a minimum amount required by developers to launch their product, a hard cap is the total sum a team aims to gather in an ICO.
What is Hard Cap?
A hard cap of a project is referred to as the maximum capital the team is aiming to accumulate in exchange for their tokens during the early stage of funding. Therefore, when it is said the project has reached a hard cap during an ICO fundraising campaign, it means the tokens are sold out for that specific round. Essentially, the team has achieved the goal of raising funds via an ICO and it will no longer accept investors’ funds in exchange for project tokens.
Why Crypto Has a Hard Cap?
An adequate hard cap is crucial for two crucial reasons. First, is the scarcity of the project’s tokens. Bitcoin, the world’s first cryptocurrency, is valuable because it is scarce; only 21 million Bitcoins will ever be mined. The same supply and demand principle applies to any project aiming to set a hard cap. Moreover, this will protect the integrity and value of the underlying project. However, at the same time, business heads and team members must try to strike a fine balance in getting this number right. The more tokens there are, the less their value and vice-versa.
Second, a hard cap is closely associated with the roadmap of an underlying project. The team should clear the purpose of the amount raised as there have been instances of projects raising more than the funding target because they didn’t set a hard cap.
What is Soft Cap?
Soft Cap, on the other hand, is the minimum limit defined for collecting the funds in an ICO fundraising event. It is quite opposite of the hard cap as teams strive to get the minimum possible funding to keep the project running. If a team fails to raise funds beyond its limit for soft cap, it often returns the money to investors whereas some projects continue their operations with whatever amount they have accumulated.
How is a Soft Cap different from a Hard Cap?
Unlike the hard cap, a soft cap is not necessary because it is just an idea to raise funds for the development of a project and many teams have managed to gather funds without requiring a soft cap. However, crypto enthusiasts consider it a good practice to follow since it informs investors as to why an underlying project needs funding.
Understanding Capped or Uncapped ICOs
Though many projects set up campaigns to raise funds either via soft cap or hard cap, they don’t need to always put a limit on the amount they intend to raise. Both capped and uncapped ICOs have their benefits and tradeoffs.
A good example of a capped ICO is Brave, the company that carried out a successful ICO for their BAT tokens. The blockchain browser managed to raise the capped amount of $35 million in half a second. Once they got the funding, they went straight to the work without raising another penny.
Tezos, however, presents an ideal example of uncapped ICOs. The blockchain network received $232 million in its ICO event because it didn’t set up the limit for funds and instead kept raising funds until Bitcoin block #475622 was formed.
While a capped ICO keeps the network healthy, the funds are limited and may not always be enough to continue the operations, which is why projects undergo another round of funding afterward. On the other hand, uncapped ICOs can accumulate more funds to continue the project development without setting up other fundraising campaigns. However, investors are persuaded to sell the tokens at a cheaper rate for quick profits, which brings down the value of the tokens as well as the network.
The soft cap and hard cap ICOs are more than just fundraising goals. They tell us a lot about the project, team members, and their vision. While investors can evaluate ICOs to find the value of a project, there is a lot to cover, including token and coin supply, the founders, the project’s real use-case, and more. They are all important to discovering an investment-worthy project. Thus, the next time you are dicing up the prospects of another ICO, include soft cap and hard cap into your validation process.