All About Hard Cap

If you are thinking of investing in cryptocurrency, there are many terms that you must know in order to understand the workings of a blockchain and the crypto sphere. One of them is a hard cap. 

Let’s find out more about this. 

What is Hard Cap?

A hard cap is a limit that a blockchain’s code places on the maximum supply of a particular cryptocurrency. It does not allow further creation or circulation of its units upon implementation. 

Experts consider a hard cap to be positive in nature as it creates a scarcity of the crypto coin and thereby increases its value. There are a few notable examples in this regard. In 2020, Yearn Finance’s governance token, YFI, rose to over $40,000 in value. This was due to the hard cap of only 30,000 tokens. The MEME token saw similar success due to an airdrop and the hard cap of 28,000 tokens.  

A hard cap is a parameter a blockchain project’s community strictly monitors. If any situation arises in which they have to bypass this limit, they have to change the cryptocurrency’s underlying parameters and create a new crypto coin. 

The hard cap of a cryptocurrency can also be altered if there are any errors in its code. A good example in this regard is Bitcoin’s 184M inflation bug. It broke Bitcoin’s total supply of 21 million before it was fixed. 

Use our crypto tax calculator to calculate your taxes easily.

Hard Cap In ICO

The term hard cap has another explanation from the perspective of an Initial Coin Offering (ICO). It refers to the maximum number of tokens that a blockchain project can sell. A coin’s hard cap is set by the development team of a crypto project. They strike a balance between the upper limit of the ICO’s goal and the scarcity of the tokens.  

Hard cap relates to the highest amount of funds that the development team wants to collect during the Initial Coin Offering. If a hard cap is achieved during an Initial Coin Offering fundraising, that token is deemed sold out for that specific funding round. 

Advantages Of Hard Caps

Hard caps have the following advantages. They are:

1. Limiting whales

When a new coin is released, some investors called "whales" invest huge amounts of money in a new blockchain project and simply sell off all the digital assets after the ICO. These activities can cause the price of a crypto coin to massively fluctuate in the short term. Hard caps are a good strategy to keep away such investors from newly formed projects. 

2. Managing cash flow

The crypto team should have a specific road map after each fundraising round. A hard cap helps it follow that plan by managing the cash flow. It helps the developer community of a crypto coin define the goal of the money that they collect. 

In other words, a hard cap restriction allows the team to deal with the huge amount of money that they receive after an offering. 

3. Maintaining value

Cryptocurrency values depend on a lot of factors, the main being demand and supply. Hard caps set the upper limit and hence the supply of that particular coin. Thus, the makers of that coin can expect a rise in its value as demand increases with time. 

Example: The high value of Bitcoin is due to its hard cap of 21 million. 

To conclude, soft cap is another term that is frequently linked with a hard cap. The soft cap is the minimum funding that a crypto project requires to start its development works. Usually, the hard cap in an ICO is always set higher than the soft cap.

Use our crypto tax calculator to calculate your taxes easily.