In order to evaluate projects with the potential for future success, investors must consider many different factors. In particular, the two most important factors that investors need to consider are the hard cap and the soft cap. So what are the hard cap and the soft cap? Let’s find out in the article below!
What are soft cap and hard cap?
The soft cap refers to the minimum amount of funds that a cryptocurrency project needs to raise during an initial coin offering (ICO). The soft cap is set to ensure that the project can raise enough funds from investors so that the project can continue to develop and operate after attracting enough capital. If the project does not reach the soft cap, the funds raised will usually be returned to investors and the project may not be implemented.
The soft cap is usually set by the project team itself and is based on multiple factors, including the project's financial needs, development costs, market potential, and business plan. Reaching the soft cap can be seen as an important milestone for the project as it ensures that the project has sufficient funds to continue to develop and grow.
The hard cap is the maximum amount a project hopes to raise during the ICO sale. The hard cap is considered an upper limit on the number of tokens that can be sold during the ICO crowdfunding process. If the hard cap is reached, the ICO sale will end and the project’s tokens will be considered sold out.
There are many reasons why a hard cap is important. First, it helps prevent projects from raising too much money. If a project raises too much money, they may be tempted to spend it on unnecessary things. Second, the hard cap tells investors how much money the project needs. Third, the hard cap can help protect investors from scams. If a project does not reach the hard cap, it is unlikely to be a scam.
Similar to the soft cap, the hard cap is usually set by the project team based on factors such as project goals, development costs, and market conditions. The hard cap is usually much higher than the soft cap because it represents a fundraising goal rather than a minimum viable goal.
The importance of hard cap and soft cap
The hard cap is important to the cryptocurrency market in many ways:
Creating scarcity: By limiting the maximum number of tokens in circulation, a hard cap creates a limited supply of tokens, making them more valuable.
Preventing inflation: Inflation is an increase in the money supply that can cause the value of tokens to decrease. By limiting the supply of tokens, hard caps can help prevent inflation from happening.
Project Funding: Setting a hard cap for a cryptocurrency project ensures that the project has sufficient funding for continued growth and success in the future. It is likely that no additional funds will be raised beyond the initial coin offering (ICO). This practice can prevent possible over-funding issues in the future.
Investor Protection: Hard caps can help protect investors from fraudulent activity. If a project does not have a hard cap, investors can invest without limit. This can lead to investors being scammed if the project is not legitimate.
The above is the importance of hard cap in the cryptocurrency market.
Soft cap also plays an important role in crypto projects. It represents the minimum amount of funds required for a project to continue to develop. If a project does not reach its soft cap, it may not be able to progress further. This helps ensure that investors do not invest in projects that have no potential for success.
Do all public projects have hard cap and soft cap?
Not all projects use both hard and soft caps, and it is up to the project's development team to decide whether to use a hard or soft cap. Some projects choose to sell an uncapped ICO, meaning there is no limit to the amount they can raise. This can be a good option for projects that are very confident in their success and believe they can raise a large amount of funds. However, it can also be a risky option for investors because there is no guarantee that the project will be successful. Here are some examples of projects that use unlimited ICOs:
Tezos (XTZ)
EOS (EOS)
Cardano (ADA)
These are just a few examples of projects that have used uncapped ICOs. There are many others that have done the same.
Summarize
Soft cap and hard cap are not only indicators of fund raising, but also one of the important factors in fundamental analysis. Through the above article, I hope readers can gain more knowledge and help their investment research process. Good luck!