The soft cap is the smallest specified limit of funding required to successfully launch a new crypto project during an ICO. It’s the minimum amount of money a new cryptocurrency project can raise from investors in its Initial Coin Offering (ICO). Some investors buy coins in an ICO event with the hopes that they will sell them later at a price that is higher than they purchased them.
Most times, the project owners also have a maximum amount of money they intend to raise at the end of an ICO, often known as a hard cap. If a team is unable to raise funds to meet up to its soft cap limit, it sometimes returns the funds to its investors.
For instance, a soft cap of $1M means that if a project raises $999,999, the fundraising campaign will be considered unsuccessful. But if it successfully raises an amount beyond the soft cap, they go ahead to develop the project with the money they raised.
When it comes to crowdfunding in the crypto space, setting a bar is crucial — not only because it’s a common practice but because it helps to show a sense of direction for the project team. However, they aren’t entirely necessary, since many teams have managed to raise funds without establishing a soft cap for the project.
Looking out for the soft cap of a team is also a way to assess a team’s experience and understanding of what they are trying to accomplish in a project. Be skeptical about abnormally low and high soft cap values. It reveals both the team’s inexperience and lack of legitimacy of the project. On the other hand, a well-defined and properly-conveyed soft cap shows a team’s experience and legitimacy.
What does hard cap mean?
A hard cap of a new token is the maximum amount of money such a token can receive from investors in its Initial Coin Offering (ICO). Setting the right hard cap can be quite cumbersome. If you set an amount too small, chances are a project may not completely use up the funds. But if you set a too big hard cap, maybe even double the real amount that you need, this can also become a challenge.
This extra money could be spent on bonuses for the founders and advisors, which is also not a good idea. In this case, the community will accuse such a project of wasting the investors’ money.
Generally, a hard cap is the major financial goal of an ICO and it is always larger than whatever the small-cap is.