Without talking about initial coin offerings, you cannot address caps. Also known as ICOs, an initial coin offering is synonymous with the initial public offering (IPO). As a private company that wants to generate capital for a project or raise investment in the business, you can gain funds from public investors through IPO.
ICOs, on the other hand, is a way of inviting potential investors to invest in products relating to cryptocurrency. As an investor, you can purchase a new cryptocurrency token when you buy into an ICO of a company. Start-up companies mostly use ICOs to generate capital from the public without padding through regulations that might be a challenge to them.
Without ICOs, it will be challenging to understand soft caps and hard caps and how they are distinct from each other.
What Are the Differences Between a Soft Cap and a Hard Cap?
The soft cap is the lowest amount of funds an ICO can raise and sell. If the company operating on an ICO cannot generate up to that amount, the project will be cancelled, and the gathered funds will be returned to the investors. Initial Coin Offering is one of the best ways to raise capital which is why most projects reach their soft caps.
To measure a team’s experience and understand its goal, you can analyse the soft caps metrics. As an investor, you should avoid abnormally low and high soft caps, which outline the team’s inexperience and potential signs of illegitimacy. On the other hand, a comprehensible soft caps metric show the professionalism of the project’s team.
The hard cap is the highest amount of capital an ICO can generate and sell. During the early fundraising stages, the development team exchanges their tokens for capital. The tokens are sold out when the capital exceeds the highest amount or upper limit. The hard cap can also be called maximum supply because it has surpassed the top target the ICO planned to raise, and there is no need to sell more tokens.
If an ICO arrives its hard cap early, the ICO phase will end early, and the project will commence. However, investors should also watch if the project does not return the funds it gathered over the hard cap. This action could be a red flag.
Most companies prefer to hit hard caps for their projects for two main reasons.
Firstly, when a project token is scarce, the prices are relatively higher, and the token’s value remains strong. In other words, higher caps generate the maximum amount of capital while protecting the token’s worth.
Secondly, the roadmap allows the company to outline the goals and objectives of the products for the view of potential investors. In addition, clarifying the purpose of the capital clearly will enable investors to fund the project, thereby exceeding the capital ceiling.
The level of a hard cap or soft cap can tell you a lot about the project, so it is essential for you always to check the progress of an ICO. However, you do not have to jump into an investment anxiously.
Because the soft cap is the lower limit, it would be wise for you to wait till the last days of the ICO to know whether to invest or not. Also, watch out for projects without hard cap goals.