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Learning the Difference Between Soft Cap and Hard Cap in Crypto

Before evaluating an ICO for a crypto project, all traders must consider many aspects.

Today we will talk about two of the most noteworthy: hard and soft market capitalization. A hard cap is the maximum amount of money a company hopes to raise in an ICO. On the other hand, a soft cap is the least amount of funds creators need to launch their project.

Our analysis will go beyond the mere definition and provide food for thought on the matter.

The Concept of Market Capitalization

Capitalization is a popular metric for calculating and tracking a cryptocurrency’s market worth.

Experts use the market capitalization of a cryptocurrency to measure its dominance and popularity. We believe it is essential to clarify that market capitalization is not, per se, sufficient to make an investment decision.

Each coin needs to go through deep analytical work by experts in the field. In this context, market capitalization is only one of the many elements to study.

In general, the larger a cryptocurrency’s market cap is, the more dominant it is in the market. As a result, pundits see market capitalization as the single most relevant metric for rating cryptocurrencies.

The current price multiplied by the circulating supply determines a cryptocurrency’s market cap.

In general, we can divide the market into three categories:

  • Large-cap coins are tokens with substantial market capitalization. These coins will most likely be less volatile than other cryptocurrencies but still riskier than traditional assets.
  • Mid-cap coins are more volatile than large-cap cryptocurrencies, but they also have higher growth potential.
  • Small-cap coins are notoriously volatile and represent high-risk investments, despite their short-term growth potential.

Soft Cap Definition

A soft cap refers to the lowest limit for a blockchain project launch in crypto fund-raising. It is a purely theoretical value, and its definition is entirely arbitrary.

On the other hand, there is a hard cap, the maximum amount of funds that the team may collect. If a team cannot raise funds above its soft cap limit, it may choose to close the project. In this case, investors typically receive a refund of the money they spent.

However, nothing usually forces the team to stop the project if funding is lower than the soft cap. In other cases, developers may use the money to develop the project further.

If you are familiar with pre-sale, ICOs, and other offerings, you will know that these limits don’t follow rigorous rules. While one may doubt the validity of a project that cannot reach its soft cap, there are no regulations on the matter.

Each crypto project has a roadmap with ambitious milestones. A soft cap should enable developers to deliver the minimum viable product (MVP) to the market. Ideally, the soft cap amount should be sufficient to provide money to the team for initial developments.

What about the hard cap? Why would a team limit the amount of money it can collect? The following section will provide more details on the matter.

The Need for a Hard Cap

An excellent hard cap is necessary for three important reasons. Let us give more details in the following subsections.

Creating Scarcity

The world’s first cryptocurrency, Bitcoin, is valuable because, among other things, it has a limited supply. As most crypto enthusiasts know, there will never be more than 21 million BTC on the market.

Any project trying to impose a hard cap must follow supply and demand principles. The concept is very similar to what we see in the art industry if you think about it.

Business leaders and team members, on the other hand, must strike a delicate balance to get this number correct. In general, the value of tokens decreases as the number of tokens increases, and vice versa.

This principle guides the category of deflationary tokens, a popular system in the blockchain sector.

Being Realistic

The hard cap has an implicit link to the underlying project’s roadmap. The team should always clarify the purpose of the collected money during each offering phase.

Think of a project that promises minor developments and observes relevant hype on the market (just like, for example, memecoins). In this case, the team may find it hard to handle an enormous amount of money at once.

The hard cap limit can help teams control the money inflow on a young project.

Limiting Whales

Speculators may decide to put a significant amount of money on a new project, only to dump the coins after the ICO. These “whales” can undermine the credibility of a project, causing enormous short-term price fluctuations.

The hard cap mechanism can help the team keep wealthy speculators away from their token.

Do All Projects Use Hard and Soft Caps?

Everything we have mentioned in our article is only valid for a particular group of projects. Specifically, we are talking about those that enter the market with a capped ICO. What happens when a team decides to use an uncapped ICO scheme?

There are many cases of listing in both categories. Tezos (XTZ), for example, entered the market with an uncapped ICO. Conversely, Brave (BAT) used a capped system to debut in the industry.

While a capped ICO keeps the network healthy, the limited funds may not always be enough to keep the business running. A project underestimating its soft cap value may require a second investment round.

Key Takeaways

Soft and hard caps ICOs have the power of sending a message to the market beyond the funding matter. They reveal much about the project, crew, and vision. A good strategy is to try and understand whether the soft cap of a project is realistic compared to the team’s goals.

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For the same reason, a project with no hard cap goal may risk suffering from speculation after the ICO. These tools should be part of a thorough analytical process that investors follow before investing in a token.

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