In the crypto space, the question "what is hard cap?" can be answered two-fold. One is that it refers to the process of Initial Coin Offering (ICO). When a blockchain project seeks to raise funds, the development team will set a certain number of tokens for sale.

This amount will have a hard cap. Thanks to one such ICO, Ethereum had raised €13.09 million in 2014 by selling 50 million ETH tokens for €0.2627 per piece. If they had held their funds, those early investors would have been able to get a return on their investment by over 10,000X, given that ETH price rose to over €2,535 in the meantime.

Another, more common, way to view hard caps in the crypto space is to see it as a maximum supply of a certain token. For instance, Bitcoin has a hard cap of 21 million. Meaning, there will never be more than this number of Bitcoin tokens in circulation. The only exception is if the cryptocurrency undergoes a hard fork, where a new blockchain is generated.

This happened with Bitcoin when Bitcoin Cash (BCH) launched as a divergent cryptocurrency in August 2017. Even Ethereum underwent a hard fork, leaving behind Ethereum Classic (ETC) in 2016 in order to retrieve stolen funds. However, Ethereum doesn't have a hard cap on the number of tokens that can ever be issued.

This annual growth of tokens is called the inflation rate. It directly affects the price performance of tokens because they reflect the fundamental economic law of supply and demand. If the demand for tokens is lower than its inflation rate, its price will go down.

Despite enjoying greater popularity, Dogecoin (DOGE) regularly underperforms Bitcoin Cash (BCH) because the latter has a hard cap while DOGE has an inflation rate, source: TradingView.com

Bitcoin doesn't have this particular problem because it also doesn't have an inflation rate. Even more so than physical gold, its supply is permanently hard-capped. After all, if we were to drag a gold-filled asteroid near Earth and mine it cost-effectively, the price of gold would collapse overnight.

The same scenario cannot happen with hard-capped cryptocurrencies. In the end, ‘maximum supply' and ‘hard cap' have become interchangeable terms to indicate the long-term price performance of crypto tokens.

ELI5 Hard Cap

Hard cap is a total amount of coins of a given cryptocurrency that can ever be in circulation.