Gaussian Distribution

The Gaussian distribution, often called the bell curve, is a statistical model where most data points cluster around the mean, with extreme values becoming increasingly rare. Many foundational financial theories, including traditional option pricing, are built upon the assumption that asset returns follow this pattern.

However, financial markets, particularly cryptocurrencies, rarely adhere to this idealized shape. Prices often exhibit high kurtosis, meaning the peaks are sharper and the tails are significantly fatter than a Gaussian curve allows.

Using this distribution to forecast risk in volatile markets can lead to disastrous underestimations of extreme outcomes. It is a simplified framework that serves as a starting point for analysis but requires significant adjustment to be useful in real-world trading.