If you were an early crypto enthusiast, you might recall the ICO (Initial Coin Offering) craze of 2017, which opened the way for a few successful ventures and a slew of frauds. As a democratic crowdfunding platform, it lets ICO people raise funds for their forthcoming blockchain ventures.

Many investors were eager to participate in as many rounds as possible, expecting that the value of their ICO tokens would gradually explode. Unfortunately, although the price of a few currencies eventually increased, the bulk of ICO projects failed.

Before making a purchase, investors and consumers assess various aspects while evaluating a project’s Initial Coin Offering (ICO). The hard cap & soft cap of an ICO are the most well-known among them. A hard cap is the entire amount a company hopes to raise in an ICO, whereas a soft cap is a minimum amount necessary for developers to launch their product.

In this article, we’ll look at what are hard caps and soft caps and the importance of hard caps in the crypto-verse.

Hard cap: Definition

The hard cap of a project refers to the highest amount of money the team hopes to raise in return for its tokens during the early funding stages. As a result, when a project reaches a hard cap during an ICO fundraising campaign, it implies that the tokens for that round have sold out. In essence, the team has met its aim of raising cash through an ICO and will no longer take funds from investors in return for project tokens.

Soft cap: Definition

On the other side, the soft cap is the lowest amount that may be raised in an ICO fundraising event. It’s the polar opposite of the hard cap, as teams compete for the smallest amount of funds feasible to keep the project going. If a team does not raise enough money to reach its soft cap, it usually returns the money to investors, but some ventures continue to operate with whatever cash they have.

Importance of a hard cap

• Creating Scarcity

Bitcoin, the world’s first cryptocurrency, is valued due to its restricted quantity, among other factors. As most crypto enthusiasts know, the market will never have more than 21 million BTC.

Any effort to impose a hard cap must adhere to supply and demand fundamentals. The notion is highly similar to what we see in the art sector if you think about it.

Corporate executives and team members must strike a careful balance to get this number right. The value of tokens falls in general when the quantity of tokens grows, and vice versa.

This theory underpins the deflationary tokens category, a popular blockchain technology.

• Being Practical

The hard cap is inextricably linked to the project’s roadmap. Therefore, during each offering phase, the team should always define the goal of the money collected.

Consider a project that offers incremental improvements while observing market enthusiasm (just like, for example, meme coins). In this instance, the team may struggle to deal with such a large sum of money at once.

The hard cap restriction might aid teams in managing cash flow on a new project.

• Limiting Whales

Speculators may decide to invest a large sum of money in a new business only to dump the coins after the initial coin offering (ICO). These “whales” might jeopardize a project’s reputation, resulting in massive price swings in the near term.

The team can use the hard cap technique to keep wealthy speculators away from its token.

Bottom line

To summarize, the distinction between a hard cap and a soft cap in the crypto world is that a hard cap is the highest amount of money an aspiring crypto project plans to raise for its development needs. In contrast, a soft cap in crypto denotes the minimum amount of funds required to continue working on the project.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.