Expected Shortfall

Expected Shortfall, also known as Conditional Value at Risk (CVaR), is a risk measure that quantifies the average loss in the worst-case scenarios. Unlike Value at Risk, which only tells you the threshold of loss at a certain confidence level, Expected Shortfall looks at the tail of the distribution to understand how bad things can get when the threshold is breached.

It provides a more comprehensive view of tail risk by considering the magnitude of losses beyond the VaR limit. For cryptocurrency traders, this is a superior metric because it captures the severity of extreme events, which are common in this asset class.

It is increasingly used in regulatory frameworks and institutional risk management to ensure that firms hold enough capital to survive severe market crashes. By focusing on the expected loss during extreme conditions, it encourages more prudent leverage management and better hedging strategies.