When reading about cryptocurrencies or ICO token sales, we often come across the term hard cap. This refers is the total number of a particular coin or token that will ever be created.
If you’re planning an ICO, you need to determine this figure very carefully. You’ll need to specify the hard cap before your ICO launch. And the figure must remain fixed, to protect the coin’s integrity. This means you can’t issue and distribute more coins, even if that’s completely in your control.
Since you’re going to be raising funds for your project by selling these coins, you wouldn’t want to set the hard cap too low. Else, your project would be strapped for funds, impacting its development and prospects.
So, why not set a really really really high cap? After all, if investors are willing to buy more of your coin, that’s awesome. Why restrict them, right?
The answer is not that simple. There are many things at stake. But before we go there, let’s take a moment to understand the four most important terms used to describe coin supply.
Terms to Describe Coin / Token Supply
#1 – Circulating Supply or Coins in Circulation: This refers to the total number of your coins that are being actively traded in the market. A company may not mine all its tokens at once. So, the circulating supply would be different from hard cap.
#2 – Total Supply: This refers to the total number of your coins in existence. Not all mined coins may be in circulation in the market. Sometimes companies give tokens to core or advisory team members; but require them to hold onto these coins for a prespecified timeframe, rather than selling them off the first chance they get. In such cases, total supply would be higher than circulating supply.
#3 – Maximum Supply or Hard Cap: This refers to the total number of your coins that will ever be created.
#4 – Minimum Supply or Soft Cap: This refers to the minimum amount that needs to be raised for an ICO to be considered successful. This is lower than the hard cap.
Determining the Hard Cap: What to Consider?
Why was Bitcoin’s surge so phenomenal? Could it have been this massive if the supply was increased dramatically? Laws of supply and demand determine the value of any commodity. If the market gets flooded with something, it’s price falls. That’s exactly what investors think when they see a high hard cap. They’re investing in anticipation of a price appreciation, and a high hard cap will exert downward pressure on the price of your token.
Apart from supply, the purpose of a commodity underlines its value. You can have a higher hard cap if your coin has a well-defined and important purpose in your project.
Finally, you’ll need to justify the amount of funds you raise. You’ll have to precisely spell out how and where the funds are going to be used, and what’s the projected RoI. When there’s a high hard cap and no concrete plans of using the funds, investors see this as a red flag.
Fortunately, the soft cap concept gives us some flexibility. This should be set at the minimum amount your project needs to get off the ground. Both soft and hard cap must be carefully assessed, and the calculations must be revealed in your whitepaper.