Risk in the Crypto World: How Much Buffer Do We Need?

Ever since digital currencies like Bitcoin and Ethereum started gaining traction with investors, a big question has been on everyone's mind: how risky are these investments? To answer that, we took a close look at two key metrics: Value-at-Risk (VaR) and Expected Shortfall (ES). These measures help us understand the potential losses and the buffer needed to cover them. We used a method called GARCH modelling followed by Filtered Historical Simulation to analyze Bitcoin, Ethereum, Litecoin, and Ripple. Guess what we found? Crypto is riskier than you might think. This means investors need a bigger safety net, or what we call "risk capital, " to handle potential losses. It's like having a larger emergency fund for your investments. This is crucial because digital currencies can be more volatile than traditional investments. So, if you're thinking about diving into the crypto world, make sure you're prepared for the bumps along the way.But why is crypto so risky? One reason is that it's still a new and unregulated territory. Regulations are starting to catch up, but for now, it's like the Wild West of investments. Another factor is the high volatility. Crypto prices can swing like a pendulum, which means both big gains and big losses are possible. So, what does this mean for you as an investor? It's essential to do your homework and understand the risks before you invest. Don't just jump in because your friend said so. Educate yourself on the market trends, the regulatory environment, and the potential risks. Remember, investing is a bit like riding a rollercoaster. You should buckle up and be ready for the twists and turns.