Value at risk
What loss level is a market unlikely to exceed, and how does one very bad week change that estimate?
In plain words
Value at risk (VaR) states a loss figure that a market is not expected to cross more than a chosen share of the time, such as one week in twenty. It is a threshold, not a worst case.
Why it matters
VaR turns scattered historical moves into one number that can size positions and set limits. But it only marks where losses become unusual, saying nothing about how deep they can go once that line is passed, and the estimate shifts whenever an extreme week enters the data.
In a real week: ETH, week of 17 January 2022
In the week of 17 January 2022, ETH fell 24.14%, with annualised realised volatility of 115.0% and a largest hourly move of -4.97% at 21:00 UTC on Friday 21 January. Across 205 weeks of history, that weekly return sat at the 4.0 percentile, so only a very small share of prior weeks were worse. A weekly VaR set at that rarity level would have been breached, and once the week enters the data set the estimate for later weeks rises.
A common mistake
Reading VaR as the most money that can be lost. It marks the entry into rare territory; losses beyond it can be far larger, and one extreme week can push the whole threshold higher.