The term “cap” is likely to be familiar to anyone who has been involved with cryptocurrencies for any significant amount of time. It usually refers to a limit on the number of tokens a project puts into circulation.
Anyone who has been around crypto long enough has probably heard of the term “cap”. It usually refers to a limit on the number of tokens a project puts into circulation. For example, Bitcoin has a maximum limit of 21 million coins. Once all these coins come into circulation, no new coins can be produced. This scarcity will boost the price of BTC in the future.
However, circulating supply is not the only context in which the term “cap” is used. It can also be used to describe the economics of an ICO, IEO, IDO, or any other cryptocurrency fundraising campaign.
In this context, it also has a counterpart known as a ‘soft limit’. Follow along as we explain these two concepts, how they work, and their pros and cons.
What is a hard cap in terms of crypto fundraising?
When it comes to an ICO, IDO, IEO, or any other form of crypto fundraising, a hard cap is the maximum amount of funds a project seeks to raise through the sale of its tokens.
Once this maximum limit is reached, no more tokens will be available for purchase. Projects choose a cap amount based on their development costs and other needs.
What is a soft cover?
A floor is the minimum amount of funding that a project seeks to raise through its ICO, IDO, or IEO. It is a purely theoretical number because it is not strictly applied.
Some developers will get by on the funds received, even if they don’t reach the minimum limit. However, in many cases, if the project cannot reach the minimum limit, the team will abandon the project and return the funds to the investors.
Pros and cons of setting hard and soft stops
The development team will often provide reasons for the hard/soft cap they have set. These ratios give investors a fair understanding of the team’s experience and provide insight into what they are trying to accomplish with the funds.
If the team sets a limit too high or low, or continues without one, it could be a red flag and prompt further investigation into the project. It is also a red flag if the project cannot reach its hard cap, indicating that investors do not believe in the future potential of the platform.
A capped ICO also creates scarcity, driving up the price of the token, a win-win for project developers and investors. Without a cap, a large number of tokens will enter circulation and investors may be tempted to sell a portion of their holdings prematurely.
This can affect the valuation of the currency and slow down the growth of the project. A hat can also keep whales at bay. It will limit the coins on offer and ensure that a handful of investors do not end up with a large number of tokens.
Brave is a prime example of a crypto project that launched its token using a limited ICO. The blockchain browser set a maximum limit of $35 million, which it was able to cash out in just half a second. Once this amount was reached, the ICO was closed and the developers went to work with the funds they raised.
However, there are some downsides to a limited ICO. If the project sets the limit too low, the development team could receive less funding than necessary. In this case, they would have to do additional funding rounds to raise the necessary funds to complete the project.
Hard and soft covers tell you a lot about a project, its team and its vision. If the project cap is realistic compared to team goals, that’s usually a good sign for investors. However, a project with no cap could indicate a lack of planning or, perhaps, something more sinister, like a rug pull.