How Does a Portfolio’s “Value at Risk” (VaR) Calculation Often Underestimate Tail Risk?

VaR is a statistical measure of the maximum expected loss over a set time horizon at a given confidence level (e.g. 99%).

It often underestimates tail risk because it typically relies on the assumption of a normal distribution, which has thin tails. Since financial returns, especially crypto, have fat tails (high kurtosis), VaR models fail to capture the true probability and magnitude of extreme, low-probability losses.