ICO Hard Cap vs. Soft Cap – Easily understand the difference
The evaluation of an Initial Coin Offering includes many factors. There is a lot of statistical information for every perspective investor to keep into account and to understand. Knowing the hard cap and the soft cap of an ICO is some of this statistical information that every investor should know. However there is a significant difference between capped and uncapped Initial Coin Offerings.
But a lot of people still do not understand the difference. In this article I will explain what the differences are, why it’s important to know these things and to keep them in mind when investing in ICOs. This article will not focus on what an Initial Coin Offering is. You can read about them in our ICO comprehensive guide.
What is a Hard Cap?
The hard cap of an ICO means the maximum amount of capital that it aims to gather. Most of the up and coming cryptocurrency projects set the hard cap very high. Most of the set hard caps are unlikely to be reached. But famous or hyped projects do reach it with ease. The hard cap is the number of the maximum capital needed and projects will mostly stop accepting additional funding after the hard cap.
If an Initial Coin Offering reaches its hard cap early in the ICO phase then the phase will end early. The tokens will also be distributed earlier than it was going to. If a project doesn’t return the funds gathered over the hard cap it is often a big red flag for investors that they should keep in mind. The hard cap is pretty important because of scarcity which is one of the most important factors for the value of cryptocurrencies. Supply and demand is the main price driving correlation.
What is a soft cap?
The soft cap is the capital amount gathered at which the crowdsale event will be considered successful. It is the minimal amount of funds needed and aimed at by the project to proceed as planned. Most of the projects reach their soft caps because an Initial Coin Offering is currently one of the best ways to kick start a project and to raise capital.
The soft cap is not guaranteed to be reached and it has mainly a speculative nature. If it isn’t reached then most of the projects will shut down and return all the raised capital to the investors. Not all do this and some proceed with the project regardless of the capital raised. The project then enters life support mode. For investors it is important that the soft and the hard cap are based on numbers and real plans. Transparent projects are the one who build the most trust with their community.
Capped or Uncapped ICO
Not every ICO has a set cap limit on how much capital they will take. In capped Initial Coin Offerings the excess money is returned to investors after the hard cap is reached. Overhyped ICOs can reach their hard cap in less than a minute. The pros about a capped ICO are that there isn’t an overflowing of investors and the ecosystem is kept healthy. This benefits long term holders because there isn’t excessive selling at the beginning.
An uncapped ICO collects as much as they can. A lot of the bigger ICOs go for an uncapped execution of the crowd funding. A positive side effect is that the project and the team behind it have more funds to work with and to spend on expansion and marketing. A plus for the investors is that everyone gets the tokens they want. A negative about it is that an excessive amount of token holders and aggressive investors may prove to be unhealthy for the long term of the project. The most aggressive investors that buy cheaper tokens in the ICO usually aim to sell them immediately. These quick profits cripple the progress and the price of the coin.
Hard cap is important for blockchains
Smart investors should always check the progress of an Initial Coin Offering before investing. The status of the hard cap and the soft cap can tell us a lot of things for the crowd funding campaign. If the soft cap looks hard to reach it is maybe a better idea to wait for the last days of the ICO. If you wait for the last days you can have the most objective opinion on whether the ICO will go as planned or if it’s a waste of time.
Short term investors that invest in an ICO want to sell their tokens immediately so often coins are sold cheaper than ICO price when the tokens are implemented at the bigger exchanges. Often it is smarter to wait for an ICO to go live before buying the tokens. Also many ICOs suffer from hacker attacks and it is normal for many investors to worry about the money they are investing.
Another key piece of the puzzle when evaluating a coin is the supply. This and the price both determine the market capitalization. The other key piece is the number of all the minable coins. Also how and will they be mined. Cryptocurrencies that are not minable are released in schedules to the circulation.
The coin mining schedule is referred to as the emissions curve or schedule. It helps to anticipate how valuable will a coin be in time. A lot of factors play a role here, but a coin that is mined is less likely to be volatile. Also if large quantities of coins are dumped constantly to the circulation ecosystem the currency will depreciate in time.
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- Top ICOs of 2018: Initial Coin Offerings that beat the Crypto Bear’s market - Feb 26, 2019
- Ethereum hard forks Constantinople and St. Petersburg scheduled by the end of the week - Feb 25, 2019
- Ethereum founder and CEO, Vitalik Buterin revealed his non-Ether holdings and revenue sources - Feb 22, 2019
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