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Evaluating ICOs: Importance of Soft Cap and Hard Cap

15 Jul 2022 By : Coin Gabbar
Southeast Asia’s Lar

If you were an early adopter of cryptocurrency, you may remember the ICO (Initial Coin Offering) mania of 2017, which set the stage for several legitimate projects as well as a number of scams. It serves as a democratic platform for crowdfunding that enables ICO participants to raise money for upcoming blockchain projects.

Many investors anticipated that the value of their ICO tokens would progressively rise, therefore they were keen to take part in as many rounds as they could. However, even if a few currencies finally saw a gain in value, the majority of ICO ventures were a failure.

Investors and customers evaluate a project's ICO from a variety of perspectives before making a purchase. The two most notable ones for an ICO are the hard cap and soft cap. A soft cap is the minimum amount developers need to begin their project, whereas a hard cap is a total amount a firm expects to raise in an ICO. 

In this article, we will discuss the capitalization of the crypto market, hard caps, soft caps, and their role in the crypto-verse.

Capitalization in Crypto Market

Market capitalization is a crucial determinant for stock market investors. But for cryptocurrency investors, it's not exactly the same.

A cryptocurrency's market capitalization represents its overall value. The price of the cryptocurrency is multiplied by the number of coins in circulation, as compared to the stock market, which determines market capitalization by multiplying share price by the number of shares held.

A company's market capitalization in the stock market designates its investment category, such as small cap, mid cap, or big cap.  The term "market cap" is frequently used to describe a business's value, which might be reflected in how risky an investment in the firm is. Large-cap equities often have fewer risks than mid- or small-cap companies, but they develop more slowly.

But cryptocurrencies are relatively new. In reality, it is so new that these categories have not yet developed. Additionally, there is less need to consider market cap when making investment decisions because experts advise sticking to Bitcoin and Ethereum and limiting crypto to no more than 10% of your whole portfolio.

The market capitalization of cryptocurrencies may be helpful if you want to know the range or potential of a certain coin, but it shouldn't play a significant role in your investment decisions.

Importance of Soft Cap

It is the minimum amount that should be raised for an ICO. The money invested is refunded to investors if the soft cap for the ICO is not reached.

A fee threshold's presence or absence is essential in figuring out whether an ICO is successful or not. As per the concept of this threshold, there are two types of ICOs: limited (capped) and limitless ICOs.

Limited ICO means that there is a restriction placed on the amount of money that can be raised during a token sale. After the close of trade, all surpluses are returned to the participants. An unlimited ICO means the project will use all of the funds that are raised. The team has more resources for work, and more investors receive tokens, which is advantageous.

But, there is another issue with this, unlimited releases disguise the cost of the token, and tokens will cost less, and a team will likely spend more than they would under a tight spending budget.

A soft cap is not mandatory because it is an idea used to raise funds for project development. Many teams have successfully raised money without a soft cap. But, it's a smart move to make as it shows investors why a project at the core requires money.

Importance of Hard Cap 

A project's hard cap is the maximum quantity of funds the company hopes to get in return for its tokens during the first financing phase. As a result, when a project reaches a hard cap during an ICO fundraising campaign, it means that all of the tokens have been sold for that round. In short, the team's aim of raising money through an ICO has been accomplished, and it will no longer take investors' money in return for project tokens.

Two major factors make a Hard cap important-

Establishing Scarcity

Any project attempting to impose a hard cap must follow the same supply and demand factors. Additionally, this will safeguard the project's worth and reliability.

 The value of tokens decreases with increased quantity and vice versa so, team members should carefully balance these quantities to get the value exactly right.

Limiting whales in a sensible manner

Speculators can decide to make a big investment in a startup only to sell their tokens after the ICO (ICO). These "whales" might endanger the standing of a project, leading to significant price fluctuations in the near future.

To prevent powerful speculators from purchasing its cryptocurrency, the team might employ the hard cap strategy.

Implementing Hard and Soft Cap

There are various methods used to attain the corresponding soft and hard caps.

Capped First, Come First, and Served First

The maximum number (cap) of the tokens, which are sold for a specified price, is established in this case. No tokens are given to those who invested too late. Sometimes the caps are reached a little bit quicker. This is due to the possibility of investing more benefits, during the pre-sale. It is the most typical technique for obtaining a hard or soft cap.

Auction: Capped or Uncapped

Investors have the chance to provide a certain price during a capped auction. Lower bids are accepted because a variable amount is then spent in terms of the price offered.

During an unlimited auction, Investors put their bids in terms of price and the number of tokens they want. Once the tokens are all used up, they move on in decreasing order.

Redistribution after Capping

In this technique, investors provide the necessary product. It is rarely employed due to its complexity and effort. The total value of the needed editions will determine how many tokens are presented later. However, with really well-known ICOs, this leads to a smaller quantity of tokens than expected. The difference between the bid and the token payout is refunded.

ICOs with no cap

This less popular approach comes with a lot of risks for investors. Its goal is to generate an endless supply of tokens over a long period. Due to the lack of a soft or hard cap, it is difficult to determine the project's direct market value at the time of the ICO.

Capping with a Limit Per Buyer

In this scenario, buyers are only able to pay a certain amount for a predetermined quantity of tokens. This technique follows the rule of First come First Serve. In order to prevent a single buyer from buying an excessive amount of tokens, customers are often recognized using the Know Your Customer (KYC) procedure.

Conclusion

The soft cap and hard cap are just more than fundraising initiatives. They provide a lot of information on the project, the team, and their mission. 

Companies and investors both expect to profit significantly from ICOs. One group of investors thought they had the knowledge to select the ideal ICOs that would generate great profits, but the other group observed others make significant gains and did not want to lose out on the chance. If you also want to invest in ICOs and make a profit from them, go visit CoinGabbar. It provides the ICO Calendar, a list of all ICOs with information sorted by date. The information in it could be helpful for investors.

Choosing a project that is worthy of investment, is crucial. So, when you are slicing up the potential of a new ICO, take soft cap and hard cap into consideration throughout the validation process.

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