The term “hard hat” may 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 put into circulation.
Anyone who has been around cryptocurrency long enough has probably heard the term ‘hard cap.’ It usually refers to a limit on the number of tokens put into circulation. For example, Bitcoin has a hard cap of 21 million coins. Once all these coins have entered circulation, no new coins can be produced. This scarcity will affect the price of BTC in the future.
However, circulating supply is not the only context in which the term ‘hard cap’ is used. It can also be used to illustrate the economics of ICOs, IEOs, IDOs or other crypto fundraising campaigns.
In this context, it also has a counterpart known as ‘soft hat.’ Tag me when I explain the concept, how it works, and the pros and cons.
What is the hard cap on crypto fundraising?
When it comes to ICO, IDO, IEO or any other form of crypto fundraising, the hard cap is the maximum amount of funds that the project is looking to raise through token sales.
Once this hard cap is reached, tokens will no longer be available for purchase. Projects choose hard cap amounts based on development costs and other needs.
What is a soft cap?
A soft cap is the minimum amount of project funding to be raised through ICO, IDO or IEO. It is a purely theoretical number because it is not strictly enforced.
Some devs will do with the funds received, even if they do not meet the soft cover. However, in many cases, if the project cannot reach the soft cap, the team will abandon the project and return the funds to the investors.
Pros and cons of setting hard and soft lids
The development team often gives reasons for the hard/soft caps that have been set. These reasons give investors a fair understanding of the team’s experience and provide insight into what the fund is trying to achieve.
If the team sets the cap too high or low or they proceed without one, it can be a red flag and quickly add additional research to the project. It is also a red flag if the project cannot reach the soft cover, indicating that investors do not believe in the future potential of the platform.
A closed ICO also creates a shortage, which gives the token value, a win-win for project developers and investors. Without a cap, many tokens will be in circulation, and investors may be tempted to sell part of their previous holdings.
This can reduce the value of the coin and slow down the growth of the project. A cover can also keep whales at bay. It will limit the coins on offer and ensure some investors do not end up with a large amount of tokens.
Brave is an example of a crypto project that launched a token using a closed ICO. The blockchain browser set a hard cap of $35 million, which can be collected in just half a second. Once this amount is reached, the ICO is closed, and the devs go to work with the collected funds.
However, there are some disadvantages of closed ICOs. If the project sets the cap too low, the development team may receive less funding than it needs. In this case, they will need to hold an additional funding round to raise the funds needed to complete the project.
Hard and soft covers say a lot about the project, the team and the vision. If the project numbers are realistic compared to the team’s goals, it is generally a good sign for investors. However, a project without a cover can indicate a lack of planning or, perhaps, something more sinister, such as pulling the rug.