Introduction to Soft Cap and Hard Cap in Crypto
Soft Cap and Hard Cap in Crypto
Story originally published on https://koop360.com/blog/introduction-to-soft-cap-and-hard-cap-in-crypto/
If you have been in the crypto market from the early years, you might be aware of the craze of Initial Coin Offering, i.e. ICO came into the limelight in 2017. As a result, it created a path to a few successful businesses and a large number of frauds. ICO is a democratic platform for crowdfunding that supports its people in their upcoming blockchain businesses by raising funds.
In this article, we will explore hard caps and soft caps and why hard caps are important in the crypto verse.
There were a large number of investors who were interested in participating in ongoing rounds. They had expectations that their ICO token value would steadily go high to a great level. But unfortunately, most of the ICO currencies failed to show improvement. There were only a few which experienced a price increase.
While making an evaluation of Initial Coin Offerings of a project, consumers and investors make an assessment on several aspects. Based on these evaluations, they make purchases. The most common aspects that are considered include the hard cap and soft cap of an ICO. A hard cap is referred to the complete amount that an agency believes in raising in an ICO, whereas a soft cap is a minimum amount that is essential for developers in order to release their products.
What is Hard Cap?
The highest amount that the team expects to raise against its token in the early stages of its funding is referred to as the hard cap. Hence, during an ICO fundraising campaign, when a project attains its hard cap, it means for that particular round, the tokens are sold out. Finally, it implies that the team has accomplished the goal of raising funds via an ICO and doesn’t need to take funds from investors anymore in return for the tokens of the projects.
What is a Soft Cap?
NFTs are one-of-a-kind blockchain-based crypto tokens. As a result, blockchain serves as a decentralised ledger that tracks the ownership and transaction history of each NFT, which is identified by a code and a unique ID, in addition to extra metadata that no other token can match.
But what is the work methodology of a non-fungible token? Let’s have a look at the following to see if we can find an answer:
WHY IS A HARD CAP IMPORTANT?
Can you guess why Bitcoin is the most valued cryptocurrency even after being the world’s first one? The answer is due to its scarcity in the crypto world. There may also be other reasons, but this is one of the major reasons behind its value because most crypto enthusiasts are familiar with the fact that there will not be more than 21 million BTC in the world.
The efforts put into imposing the hard cap should be coherent with the supply and demand policies. If you think about it, you will find that the idea is quite similar to the art sector.
The team members and corporate executives should create a cautious balance in getting this number correct. Generally, when the quantity of the token increases, there is a fall in the value of the token and vice-versa.
This theory is the basis of the deflationary category of the token, which is well-known blockchain technology.
Effective Fund Management
The hard cap is linked to the roadmap of the project in a tangled way. Therefore, it is important that the team should recognize and determine the goals of the collected funds during every offering stage.
Let’s imagine a project offering improvements that are incremental in nature while taking into account the market enthusiasm. (for instance, meme coins) In this example, the team may have problems dealing with large amounts of money at once.
The restrictions of the hard cap can help teams in effective management of the flow of cash on a new project.
Keep Speculators Away
There may be speculators that decide to put a large amount of money as an investment in new business projects. The aim may be just to dump the coins after the ICO (Initial Coin Offerings). These in cryptocurrency are termed “whales”. These whales can endanger the reputation of the project and result in massive swings in prices in the near future.
A hard cap technique can help the team keep such rich speculators out of reach of its tokens.
To conclude, the difference between a hard cap and a soft cap in the crypto-verse is that a hard cap is the maximum amount that an aspiring project is planning to raise to meet all its development requirements. Whereas a soft cap is a minimum amount that is required in order to continue work on a project.