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Some ICOs decide to set a cap on how many coins investors can buy. However, some people choose to offer unlimited coins at the sale.
Different teams can follow different strategies to obtain success in this growing market. Today, our guide aims to make a clear distinction between capped and uncapped ICOs.
Understanding the Concept of ICOs
An ICO (“Initial Coin Offering”) is a way to launch a new cryptocurrency. ICOs are a way to raise money for a project by making and selling a digital token. Investors in a company through an ICO trading platform get unique cryptocurrency tokens. The tokens follow a fund-based distribution system.
This one-of-a-kind token gives investors access to some functions of a crypto project. These tokens subsidize projects in a decentralized economy. The intuition is that it would be hard to fund these projects with traditional methods.
Startups can get money through the ICO fundraising model. They can do this by giving out tokens on a blockchain.
Uncapped vs. Capped ICOs
From a strictly theoretical point of view, it is not hard to understand the difference between capped and uncapped ICOs.
Teams can choose a fixed price for selling their tokens in a capped ICO and limit its supply. Sometimes you may see that these initial prices have a discount to appeal to investors. Many teams choose this strategy to motivate traders to jump on the project as early as possible.
The team may set two fundraising goals during a capped ICO: a soft cap and a hard cap. You need to know that a soft cap is the minimum amount of money it plans to raise.
If the first funding round does not reach the soft cap, there will be no ICO. The team will return the money to the people who took part in the operation.
Hard caps represent the maximum amount of money the team wants to raise in their initial funding round.
There are no limits on how many tokens the market can buy in “uncapped ICOs.” Nobody is imposing a price on the token on sale. You are letting the valuation of the coin you are launching depend on the market.
Famous Cases of Capped ICOs
There were several successful ICOs in the past that followed the capped mechanism. These cases always have a fixed number of coins at a fixed price. Generally, a team chooses this approach to control the token’s launch and be more transparent.
A capped ICO has a cap on how much money a project can get. Investors get back any money they get after the cut-off. An example is Brave, a blockchain browser that made $35 million in 30 seconds with its BAT token. The team reached the money it needed and started working on the project.
When Teams Prefer Uncapped ICOs
Ethereum launched an uncapped ICO when it created its ETH token. There were no limits on how many tokens the market could buy. The same is true for the price, which fluctuated during the operation.
The price of ETH has risen over time, precisely like Ethereum’s popularity. ETH is now the most famous altcoin globally, and it may soon overcome Bitcoin’s domination.
An uncapped sale helps everyone get an opportunity to take part in the sale. The operation’s main advantage is that gas fees are generally lower. It also helps to keep whales from buying too many tokens and influencing the network.
Vitalik Buterin, Ethereum’s founder, wrote an interesting blog post in 2017 to support this theory.
What makes ICOs so interesting is that they have a low barrier to entry. Theoretically, everyone can start an ICO or help fund one. Thanks to the blockchain, people can make money in this new market.
The choice between a capped and an uncapped ICO deserves a good assessment. Our guide illustrated the main differences between these two strategies.