Initial Coin offers, more commonly known by the name ICOs are a way to raise money for a particular project by offering coins native to the project.
The investors who are interested in the project are expected to buy the coin which usually provides a utility value in the project’s ecosystem.
The terms Soft Cap and Hard Cap are two of the important measures that investors look into before investing in a project.
In this article, we will look at what Soft Cap and Hard Cap means in relation to ICOs.
What Is A Soft Cap?
A Soft Cap, in simple words, is the minimum amount that the project offering has set as a target to be raised through its ICO. It is also the minimum requirement of funds that a particular project needs to cover its basic operations.
The Soft Cap is the value that the project managers set on their project for them to be feasible after calculating all the expenses that the project incurs throughout their development phase.
An investor can understand a lot about a project just by looking at the Soft Cap price details. A large project will have a higher fund requirement therefore it will have a high Soft Cap target when compared to other projects.
On the other hand, a low-scale project will have a lower Soft Cap target which suggests the minimal requirements to run the project.
Projects once they reach the Soft Cap limit may choose to continue with the fundraising process to generate additional funds or may close the project ICO.
They may also choose to return the excess funds back to the investors of the project.
Projects that do not meet the soft cap requirements either extend the ICO offering until they meet the requirements or choose to start the project anyway with the available raised funds.
A project that meets its Soft Cap requirements in its set time is one that is generally seen as more trustworthy and reliable.
Meeting the Softcap requirements also helps in increasing the goodwill and worthiness of the projects.
Importance Of Soft Cap
Soft Cap limit is important due to the following reasons:
- It helps the investor to understand the goals of the project: A SoftCap helps an investor to understand the financial goals of a project and reason with their figures according to their estimates.
- Soft Cap fulfillment helps to instill confidence among potential investors with regard to the financial planning capabilities of the project group
- The Soft Cap measurement will help the project team as well as other affiliated entities to know how much funding they have in hand to work with.
These are a few of the reasons why Soft Cap is important in an ICO offering.
Now, let us look at what a Hard Cap is and why they are important in the sections below.
What Is A Hard Cap?
A Hard Cap is the maximum amount of funds that the project expects to raise through its ICO offering.
A project that achieves its Hard Cap limit suggests that the project and its token are in large demand among investors.
Pretty much every ICO is designed in such as way that they end as soon as the Hard Cap limit is met so that there is no inflation and over-saturation of the token in the market.
Projects that exceed their funding after reaching the Hard Cap limit could also face management and financial challenges in terms of appropriating the funds for each group.
When a project is overfunded the token values also face a huge risk of becoming diluted and ending up losing its value following its listing.
Importance Of Hard Cap
HardCaps are important for the following reasons:
- HardCaps help investors know when the project has achieved their goals for funding
- HardCaps allows investors to understand the current market demand for the coin and the project
- HardCaps helps to prevent oversaturation and overfunding of the project leading to a dip in the price of the token.
- They help to prevent whale investors from dumping huge amounts of money into the project with the intention of causing price fluctuations.
Also, Read: Things You Should Know Before Starting Cryptocurrency Investment
Final Thoughts
From all the points that we have discussed in the above section regarding HardCap and SoftCap in relation to Crypto ICOs, we can find that both these measurement instruments are necessary for the accurate analysis of a project and its standings in the market.
It is therefore important that each and every investor try to use these two tools to measure the worth of a project before investing in them.
