VaR Analysis (Value at Risk Analysis) in crypto is a quantitative risk management technique that estimates the potential financial loss of a cryptocurrency portfolio over a specific time horizon, at a given confidence level. It provides a single metric for market risk.
Mechanism
This analysis typically employs historical simulation, parametric methods (e.g., variance-covariance), or Monte Carlo simulations to model potential future price movements of digital assets. It then calculates the maximum loss expected under normal market conditions, usually expressed as a percentage or monetary value.
Methodology
The strategic application of VaR Analysis includes setting risk limits for trading desks, assisting in capital allocation decisions, evaluating the risk-adjusted performance of investment strategies, and supporting regulatory reporting. While useful, its limitations in capturing extreme tail events or non-normal distributions common in crypto markets necessitate supplementary risk measures.
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