> he wouldn't like the price

For fun, let's try pricing a Bitcoin put option using the Black-Scholes-Merton model [1]. This model is a simplified version of real-life options models, but our parameter uncertainty will dominate the model's anyway.

I'll use the $14,400 Coinbase price [2] for both our S and K inputs, i.e. we're pricing a European put struck at spot. Term is 5 years. This site [3] says Bitcoin's historic 252-day volatility is 5.21%. Sure. We want the 5-year 365-day volatility, i.e. 14.0% [4].

The real shit show in this example is the rates component. If we use this 57% number [5], the put is worthless. We're using a Bitcoin-dollar price for the stock and strike, so let's assume U.S. dollar funding (since Bitcoin does not natively support rates in the way modern currencies do). The 5-year Treasury yields 2.25% [6].

BSM says...$1,037.01.

(Rho dominates tau, or in English, the rates component is about 2.5x more meaningful than the volatility component.)

Raising our rate to the call money rate [7] we get $792.84 with rates continuing to dominate volatility.

[1] https://en.wikipedia.org/wiki/Black–Scholes_model

[2] https://www.coinbase.com/charts

[3] https://bitvol.info

[4] sqrt([5 x 365] / 252) x 5.21

[5] https://www.bloomberg.com/news/articles/2017-11-09/keynes-wo...

[6] https://www.treasury.gov/resource-center/data-chart-center/i...

[7] https://www.bankrate.com/rates/interest-rates/call-money.asp...

I'll buy a 5yr ATM put at 1038 USD!

1. There's no way rates dominate vol for BTC.

2. Bitcoin vol is way higher than that. It's obviously higher than most stocks, and stocks are in the 20% range.

My quick calculation gives me an annualised vol of about 90% over the last year, and 140% over the last month.

That gives a put value between USD 8000 and 12000, in other words approaching the "infinite vol" limit (present value of strike).

EDIT to add: BSM takes annualised vol (or, to put it differently, vol enters only in the term sigma^2*T, and that product must be dimensionless, thus the unit of vol is 1/sqrt(year), or whatever unit you use for T). To compute it, take the average of squared log returns over a period (ie, take average of LN(P(t)/P(t-1))^2), annualise by multiplying with 365 if you have daily prices (or 252 if you have business daily prices), and take the square root of that.

You didn't finish pricing out the put option. I calculate $475 for a put. But think about this a second. That's a crazy low price for this kind of investment. You're only paying a 3.3% premium to hold a put I can exercise at any point in the next 5 years. At any point in the next 5 years, if BTC goes down by rougly 7% I'm in the money. That's a daily swing for BTC in a normal week.

I think the volatility input in this equation is way off.

And anyone who thinks this is a fair price for a PUT on BTC, please contact me as I will buy unlimited amounts of puts if you're willing to put up 50% as collateral.

Me too! Depending on your credit, that is. Finally a get-rich-quick-scheme I can get behind.

> I think the volatility input in this equation is way off

I agree. One's ability to price a put on Bitcoin is probably anti-correlated with one's willingness to sell one.

2008 was an exception - most of Buffett's investments have been in the open market where he was simply the highest bidder at the time.

The problem with a Winklevoss put is likely the credit risk, not the price

I think he would worry more about counterparty risk.