Normal Distribution

The normal distribution, or Gaussian distribution, is a symmetric, bell-shaped probability distribution where most observations cluster around the mean. It is the foundation of many classical financial theories, such as the Black-Scholes option pricing model, which assumes that asset returns are normally distributed.

However, this assumption is often criticized in the context of digital assets because it fails to account for the fat tails and extreme events that occur in real markets. While the normal distribution is mathematically convenient and easy to use, it often leads to a false sense of security regarding risk.

In practice, traders must adjust for the fact that real-world returns deviate from this ideal. It serves as a useful benchmark but is rarely a perfect description of market reality.

It is the baseline against which other distributions are compared.