What is a Soft Cap in Crypto?
A soft cap in crypto is the minimum amount of funding required for a new project to launch. This launch phase is often called an ICO (Initial Coin Offering), in which investors are given their first opportunity to buy coins or tokens of a crypto project. The project founders typically use the proceeds from this initial offering to launch their project and pay for any necessary expenses.
As an example of a soft cap, the founders of a project may calculate that they need $1,000,000 in total funding to launch and develop their project. The project therefore has a $1,000,000 soft cap.
The ‘cap’ in soft cap refers to the market cap, which is calculated by multiplying the total number of coins available by the value of each individual coin. For example, a crypto project with a price of $1 per coin, and 1 million coins available, will have a market cap of $1,000,000. This will therefore meet the soft cap requirements to launch the project listed above.
Soft cap is often contrasted with hard cap, which refers to the total amount of coins which will ever be produced and can theoretically be sold. The most famous example of a hard cap in crypto is Bitcoin, which has a hard cap of 21,000,000.
More Reading on Crypto Soft Cap
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.