Why Is Volatility a More Dominant Factor than the Risk-Free Rate in Crypto Option Pricing?

Volatility measures the magnitude of expected price swings, which directly impacts the probability of an option expiring in-the-money. Cryptocurrency prices are notoriously volatile, meaning the uncertainty and potential for large gains/losses are high.

The risk-free rate, which accounts for the time value of money, is typically a small, single-digit percentage, making its effect minor compared to the often double-digit or triple-digit annualized volatility.