What Is the Black-Scholes Model and Why Is It Less Ideal for Crypto Options?

The Black-Scholes model is a seminal option pricing model that calculates the theoretical value of European-style options. It assumes continuous trading, constant volatility, a log-normal distribution of asset prices, and no transaction costs.

These assumptions often break down in the crypto market due to extreme volatility, frequent price jumps (non-log-normal distribution), and the lack of a true risk-free rate, making the model a poor fit without significant modification.