How Is the Black-Scholes Model Used to Price Cryptocurrency Options?

The Black-Scholes model, or its extension Black-76 for European options on futures, is adapted for cryptocurrency options by using crypto-specific inputs. The model requires five inputs: the current price of the underlying crypto, the option's strike price, the time to expiration, the risk-free interest rate, and the implied volatility.

The primary challenge is accurately estimating the volatility and the appropriate risk-free rate in the volatile crypto market.