How Does the Black-Scholes Model Relate to Pricing Options on Cryptocurrencies?

The Black-Scholes model provides a theoretical framework for estimating the fair price of European-style options. While originally for traditional finance, it is adapted for crypto options by substituting the underlying asset price and volatility.

Key inputs are the current crypto price, strike price, time to expiration, risk-free rate, and volatility. Its main limitation in crypto is accurately modeling the high, unpredictable volatility and the lack of a true risk-free rate.