Hard and Soft-Cap: What is meant by these two terms in ICOs?
Those who invest more frequently in ICOs (Initial Coin Offerings) Bitcoin, Ethereum & Co., not only has the opportunity to be among the first and consequently high return, but is certainly already more often on the terms hard and soft cap stumbled. Both are indicated in a transparent manner by the project itself by reputable ICOs and provide valuable information for the crypto-investor.
Definition and practical application of hard and soft cap
The two English words can best be translated as “hard” or “soft” border. This refers to two separate funding targets for the project. The hard cap is the financing target, which will not be exceeded, even if the project could collect more money. Therefore, the hard cap also reflects the market capitalization (hence the market value) of a project once it has completed the ICO. For example, if the hard-cap was $ 50 million and has been achieved, then the project will also have a market cap of 50 million dollars. This can change later as the tokens are released and the project is traded on a crypto exchange.
The soft-cap is a soft limit and is considered the financing target, which is needed at least for the realization of the project and thus for a successful ICO. It is usually much lower than the hard-cap and should definitely be achieved. If this is not the case, serious projects offer investors the opportunity to get back the money they have transferred, since in this situation there is no guarantee that the project will have enough money to realize all the goals. Consequently, the ICO must be deemed failed if an issued soft-cap is not reached. For example, if a hard-cap is in the above-mentioned $ 50 million, a soft-cap could move to $ 8 million. Any completed funding between these 8 and 50 million will then count as a successful ICO.
Methods for the realization and organization of a capping
There are several variants of how a capping can be implemented in practice. This refers to how the respective soft and hard-cap are achieved, which could also be interesting for investors. These are briefly explained below, as they also play a role with regard to the achievement of soft and hard caps.
Capped First, Come First & Served First
Here, the maximum number (the capping) of the tokens is set, which are sold in return for a likewise fixed price. Those who were too slow and only want to invest, if the cap is already achieved, will ultimately no more tokens. In some cases, these cuts are achieved a little faster, because, for example, at a pre-sale additional bonuses could be spent on the investment. It is the most common variant to achieve a soft or hard cap.
Uncapped ICOs
A less used method that also carries many risks for investors. This will issue an unlimited number of tokens over a normally long period of time. As a result, there is virtually no soft or hard cap, which means that the direct market value of the project can not be assessed under the ICO.
Auction by uncapped or capped method
In a capped auction investors have the opportunity to offer a certain price. One calls individual procedures in such an auction also blind action. A variable number is then spent in relation to the bid price, which is why lower bids are served.
In an uncapped auction, which is rarely used, investors place their bid both in terms of price and the number of tokens desired, and then proceed in descending order until the number of tokens is exhausted. Again, there is no direct limit.
Capping with a re-distribution
Because of the complexity and the effort, this is a rarely used process in which investors offer the desired output. Later, the respective number of tokens will be issued according to the total amount of the required editions. However, with very popular ICOs, this results in fewer tokens than most desired.
The difference to the bid and the payout of the tokens will be refunded. For investors as well as the project itself, this reimbursement is not ideal for an oversubscribed sale.
Capping with a limit per buyer
In this case, buyers can only buy a certain number of tokens at a fixed price. “Who comes first served first” applies here too. Identification is usually done through the Know Your Customer (KYC) process to ensure that not one buyer buys many packages.
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Marko Vidrih
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