Hmm, in that way you could see it as the market around cryptocurrencies lacking the financial complexity that could bring their volatility back down to more normal levels.
Buffett doesn't need complex financial markets because he does custom transactions directly with companies.
A Winklevoss could easily sell him a billion-dollar five-year put, but 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
[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 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.
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.
The problem with a Winklevoss put is likely the credit risk, not the price
This must mean Buffett thinks crypto has a good chance of exploding in value! Buy Kodak! /s
Nobody wants to run a credit check every time they buy an option. That just turns the premium into a fancy loan.
If you buy an option on an American options exchange, it is cleared by the OCC [1]. They are everyone's counterparty. There is a long chain of people who have to default for you not to get your money. (Basically, the financial system has to melt down in a nation-state ending way.)
I have no idea how Bitcoin options are being handled, but suffice it to say, counterparty risk dominates any other component.
[1] https://en.wikipedia.org/wiki/Options_Clearing_Corporation
Prior to the housing crash, multiple people figured out that CDOs were full of shit and bankers were committing massive fraud with mortgage bonds. Traders could purchase credit default swaps (CDSes) to capitalize on this risk and pay the premiums until the correction hit, at which point they'd cash in huge.
But uh, here's the problem: The same bankers that were investing in mortgage fraud (all of them) were the ones that would sell you the CDSes and cash your premiums. If the housing market was truly built on fraud and corruption - and it was - and banks could collapse - and they did, requiring a bailout that the banks knew was coming - maybe the bank wouldn't be solvent enough to pay you on your bet that you so rightfully won. Your largest upside win is capped, and thus the entire trade could be easily net negative.