Every protocol/project provides an Initial Coin Offering (ICO). Investors would like to consider the ICO, every time. However, there are certain factors that they must investigate, before going in for a firm purchase. Two such factors are – hard cap and soft cap. Check these trading tips from http://trustpedia.io/
The individual investor or the team is collecting as much funds as possible. It is the maximum capital that goes towards the initial coin offering. These funds are exchanged for tokens, during the initial stage of funding.
When the tokens are sold out completely, it means that the individual/team has arrived at the hard cap of the concerned crypto. The initial coin offering has come into play here. After this, there will be no acceptance of investors’ personal funds in exchange for the project’s tokens.
Why does crypto need a hard cap?
Two essential reasons are there. One, the tokens expected by the project may not always be available. For instance, there is a cap on how much of Bitcoin will be mined. It is 21 million only. Since it is not available in indefinite quantities, it will always carry value. A similar demand and supply principle will be applicable to any project going in for a hard cap. Furthermore, such a principle will ensure that the underlying value and integrity of any project, will always be on display. Thus, it is imperative to get the number of tokens right, such that there is always a healthy balance.
When a hard cap is brought into the picture, there is greater clarity regarding the project. People should not waste time in collecting more than they need. Thus, the total sum that the team gathers in an ICO, is the hard cap.
It is the minimum limit on funds that an individual or group desires to collect for the initial coin offering event. The amount suffices to just keep the project/protocol running. In case, it is not possible to gather the requisite amount, the team decides that keeping the amount collected will serve no purpose. Therefore, it returns the money to the investors. Sometimes, the team decides to make do with whatever is available, and forget about extra funds.
Does crypto need a soft cap?
No, it is not compulsory. The idea is to just gain some funds for initiating a project. If it is not possible, the team merely sets a hard cap. Fund-raising to them, is a good practice. It helps the team understand why this exercise is necessary. Therefore, investors try to follow the soft cap-hard cap way, as much as possible.
Capped and Uncapped ICOs
Fund-raising, generally, sets no limit. Whatever amount comes the team’s way, is welcome. In other words, both, uncapped ICOs, and capped ICOs, have their advantages and disadvantages.
Uncapped ICOs bring in so much of funds that the team need not give a thought to other fund-raising ventures. However, people find it easy to persuade investors to sell tokens cheaply, in the urge to gain rapid gains. Therefore, the value of the tokens diminishes throughout. Even the value of the network goes down. To give an example, it happened with Tezos. With no limit placed on fund-raising, the ICO event managed to raise $232 million. Finally, Bitcoin block, #475622 was created.
As the name suggests, a capped ICO keeps everything systematic and on track! Such a fund-raising effort is healthy for the blockchain network. In case, the funds seem to be less for the continuity of operations, the concerned project initiates another round of funding.
Otherwise, what the team has, suffices, as viewed in the case of Brave. This company focused on their BAT tokens. It took just about seconds, to raise the pre-decided amount of $35 million. Once the team receives it, it launched the project, without bothering to garner more funds.
Hard and soft caps, uncapped and capped ICOs, give us much information about the people and the project. We come to know about the vision and mission of the project, amount of money required to be collected, the supply of coins/tokens, use case of the project, etc. Such information is important for providing pathways to trustworthy projects that are suitable for investments.