Written by Joseph Argiro

ICO Alert
October 30 2018

ICO Insights Ep. 3: Industry Analysis by Hard Cap and Soft Cap

What does an ICO's hard and soft cap say about their project?

ICO insights 3




Industry Analysis by Hard/Soft Cap

In the third post of the ICO Insights series, we will examine the hard cap and soft cap of various industries that ICO projects are competing in. We can then determine which industries are receiving the most attention from the blockchain ecosystem and its investors. Furthermore, we can attempt to understand why certain industries need more funding to execute their roadmap. Finally, we will be able to roll up that analysis and cross reference it to the average amount raised in each industry to gain a deeper understanding of the ICO landscape and its future.


The Soft Cap

The soft cap is a valuable gauge to consider when evaluating an ICO project. The soft cap should be set at the minimum amount of capital needed to execute the idea and release it to the community. The ICO should have a responsibility to set the soft cap at or above this minimum threshold, in order to ensure that the project can be accomplished if the ICO only raises its soft cap amount. A low soft cap may indicate that a project’s underlying motive is mostly to raise capital, instead of producing an intrinsically valuable technology application. The average soft cap is approximately $7 million USD.

One should consider the soft cap relative to the industry it’s trying to disrupt. A simple voting application should probably require less funding than say, a decentralized world computer.

TLDR: be wary of low soft caps, and always check to see if the ICO has raised any funds privately.

graph detailing average hard cap vs average soft cap


graph detailing average hard cap vs average soft cap shown in ETH


The Hard Cap

Similar to the soft cap, hard caps should be considered relative to their industry peers.  Just like in traditional finance, hard caps can be looked at in a cross-sectional manner, similar to PE ratios. If a hard cap is drastically lower or higher than the industry average, it should raise a red flag to the investor. Additionally, the innovative investor should consider whether the project is attempting to compete with existing incumbents, or with decentralized peers. This competitive scope can be used as a qualitative feasibility gauge; helping the investor evaluate inherent risks associated with competing with enterprise conglomerates. It can also impact the amount of funding needed to successfully disrupt industries that have been around for decades. However, the hard cap is just a fundraising target or goal, so the comparison to PE may be forced and overstretched. Feel free to dispute in the comments below.


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ICO Market Industry Concentration Analysis

ICO Alert chooses up to three keywords for each ICO that best describes their project (shown below).

ICOs broken down by industry


Getting rid of the noise

A large amount of ICOs seem to consider themselves a platform. Platform is a broad term, and we prefer the term protocol. Additionally, platform can be used in a different way to mean a marketplace, so the term is subjective. A protocol is any blockchain project that allows development of tokens on top of the platform. While many ICOs claim to be a protocol, many analysts claim there may only be room for a handful of protocols in the long run. For the sake of this article, we will consider this data point moot. Most ICO tokens can be considered cryptocurrencies, so this data point is moot as well.


Top Industries Raising Funds via ICO

Four out of the top ten chosen keywords are Finance, Investing/Trading, Exchange, Payments/Wallets. These can all fall under the umbrella of financial services. It shouldn’t come as a surprise that blockchain entrepreneurs have a narrow focus on finance, given the transactional immutable ledger that blockchain technology enables.  While financial conglomerates do possess most of the capital in the world, and therefore power over individuals, self-sovereign cryptocurrencies threaten the power structure at its very core. Decentralized apps allowing loans and other financial services to be P2P instead of centralized have the potential to disrupt the global power dynamics. This is further portrayed below by the large amount of funding raised by ICOs with keywords such as “banking” and “finance.”

Graph showing the average amount raised in USDFor crypto exchanges, there is mathematical evidence to suggest that many can coexist and thrive while only capturing a small fraction of the total liquidity pool. Specifically, crypto exchanges seem to emulate the log (x) function shown below (utility on Y axis, # of exchanges on X axis). This portrays the fact that as liquidity grows, the marginal utility of liquidity gained by each user becomes less and less over time. This may help explain why we seem to see a new exchange pop up every day. For an excellent analysis on network effects, see MultiCoin Capital’s blog. In short, networks in different markets do not always exhibit the same type of network effects with respect to marginal utility, growth, and market competition. Furthermore, a quantitative tool to measure market concentration is the Herfindahl-Hirschman Index(HHI), which creates a measured scale ranging from monopoly to perfect competition.


With solutions such as 0x that allow exchanges to share order books and liquidity, we may see the crypto exchange market drop to a lower HHI index over time, which means a more competitive market with more exchanges. However, we must consider the power and influence of the 800 lb gorillas in the room, such as Binance and OKex, which together takes up approximately 14% of the total exchange liquidity in the world. 

Interestingly enough, according to digital asset research, exchange related tokens have outperformed all other crypto asset categories in 2018 so far. Binance Coin leads the way, gaining 14.7% making it the best performing digital asset in 2018. All other tokens are underwater year-to-date.

Graph showing returns by sector in 2018
Source: Digital Asset Research

Graph showing that Binance Coin is the best performing digital asset of 2018

Source: Digital Asset Research

This may be due to the superior design of the utility token within the Binance ecosystem. Users are incentivized to hold BNB in order to receive a discount on trading fees. By users HODLing BNB, their tokens are taken out of the circulating supply, This slows the token velocity, which is an important catalyst for long term price appreciation. Token burns also have an effect on the circulating supply, and therefore market cap and price.

Stepping back from crypto exchanges, many believe that in the long run, most crypto asset sub industries will grow into oligopolies in winner take most markets, given how network effects have affected market competition in centralized networks, such as Uber and AirBnB. Subscribing to this logic, most crypto assets will go to zero in the long run while certain winners will emerge. This sounds eerily familiar to the internet boom in the early 2000s. For example, the market for social networks has grown into a massive oligopoly, with Facebook leading the way as a result of its network effects. When a network, open source or centralized, gains user adoption, it is constantly increasing barriers to entry, similar to the way antiquated companies increase efficiency through economies of scale. However, these decentralized projects are open source, which allows them to be easily forked and copied. Fortunately, it is way more risky and difficult to successfully fork the user base and/or mining hashing power for a crypto asset. Quoting Zack Gall from the Everything EOS podcast, “you can fork open source software, however, you can’t easily fork its community or userbase.”



The data shows that financial services may be the first industry to see real disruption, or even adoption, of this new technology. With the ability to perform trustless, borderless, and censorship resistant transactions, the sky's the limit for blockchain within financial services. However, just because a large number of fintech startups are vying for market share in a digital economy does not mean that the big ole bankers won’t figure out how to squash this revolution and maintain the status quo. The most likely scenario is coexistence, in fact, it’s already happening. Goldman Sachs is quietly buying crypto startups, such as Circle, while Bank of America files numerous blockchain based patents, and Fidelity opens up a trading shop. Only time will tell how the ecosystem will evolve.


Topics: ICO, Data, News, Analysis, ICO Insights