When evaluating an ICO for a cryptocurrency project, investors should consider many variables.

In this article, we will talk about two of the most noteworthy: hard and soft market capitalization. A hard cap is the maximum amount of money a company hopes to raise in an ICO. On the other hand, a soft cap is the least amount of funds creators need to launch their project.

Market Capitalization Concept

Before we continue, we want to ensure that everyone understands the concept of market capitalization. The term “capitalization” is used to describe a cryptocurrency’s trade value.

Experts use the market capitalization of a cryptocurrency to assess its dominance and popularity. We think it’s essential to emphasize that market capitalization isn’t always sufficient for a business investment.

A professional in the field must conduct a thorough examination of each coin.. Market capitalization is only one of many things to consider in this case.

The greater the market capitalization of a cryptocurrency is, the more powerful it is in the market. This means that it is more important to look at a cryptocurrency’s market cap when rating it than any other metric.

The market capitalization of a cryptocurrency is calculated by multiplying the current price by the circulating supply. In general, we can categorize the market into three groups:

• Large-cap coins are tokens with a high market value. These coins are likely to be less volatile than other cryptocurrencies, but they will still be riskier than ordinary assets.
• Mid-cap coins are more volatile than large-cap ones, but they have a greater potential for development.
• Despite their short-term growth potential, small-cap coins are notoriously volatile and carry high levels of risk.

Definition of Soft Cap

A soft cap is the lowest amount that may be attained by a blockchain project in cryptocurrency fund-raising. It’s just a concept, and its meaning is entirely subjective.

A soft cap, on the other hand, is a flexible limit that does not have a hard ceiling. There is also a hard cap, which specifies how much money a team may raise. If a project’s soft cap isn’t reached, it may be closed. Typically, investors receive a refund in this situation.

However, if the project’s funding is lower than the soft cap, nothing usually prevents the group from going forward. Developers may use funds to develop the project further in other situations.

You may know that these restrictions do not follow strict criteria if you are familiar with pre-sale, ICOs, and other similar business plans. While one may question the validity of a project that fails to meet its soft cap, there are no limitations in place.

Roadmaps are a standard feature of crypto projects. Each cryptocurrency has a path that includes ambitious objectives. The soft cap should enable developers to complete the minimal viable product (MVP) in time. Ideally, the soft cap amount should be enough to fund the team’s initial work.

Why Hard Cap is Necessary

A good hard cap is necessary for three key reasons. In the following parts, we’ll provide more information.

To create scarcity

Bitcoin is valuable because, unlike government-issued currency, its supply is limited. Bitcoin was the world’s first cryptocurrency, and it is valuable due to its scarcity. As most crypto enthusiasts are aware, there will never be more than 21 million BTC in existence.

Any project attempting to set a hard limit must stick to supply and demand techniques. If you think about it, the idea is quite similar to what we see in the art world.

In order to have a clear insight into the business, it is important for corporate leaders and team members to find a fine balance. Overall, the value of tokens decreases as the quantity of tokens increases and vice versa.

The principle of deflationary tokens, which is a popular blockchain technology, is based on this idea.

Being Realistic

The hard cap is connected to the project’s roadmap in an implicit manner. During each offering phase, the team should always describe the project’s purpose.

Consider a project that develops in small increments and is pushed by market trends (for example, as with memecoins). In this instance, the team may find it tough to manage an enormous sum of money at once.

Limiting Whales

Whales may influence the price of a new cryptocurrency by purchasing up large quantities of coins before an ICO, only to sell them afterward. These “whales” can harm a project’s credibility and cause significant short-term price swings.

The team can use the hard cap mechanism to keep speculative investors at bay.

Is it necessary to apply a hard and a soft cap to all projects?

Everything we’ve discussed in this post is only applicable to a specific sort of projects: those that launch with a limited ICO. When a project decides to utilize an uncapped ICO strategy, what happens?

There are several instances of a coin being listed in both categories. Tezos is an example of a project that started with an uncapped ICO. Brave, on the other hand, debuted in the market utilizing a capped system.

A capped ICO protects the network, but limited resources may not always be enough to keep the company operational. A small soft cap is insufficient for a project that demands future funding.

Conclusion

Soft and hard caps are popular in initial coin offerings (ICOs), as they have the capacity to send a message to the market alongside their financial goals. They provide a lot of insight into the project, crew, and vision. Try to figure out if the project’s soft cap is reasonable when compared to the team’s objectives.

For the same reason, an ICO with no hard cap might be vulnerable to speculation following the event. These applications should be used as part of a larger study before investing in a cryptocurrency.