Does "to blathe" really mean "to bluff"?

It's part of the joke. He clearly heard him say "true love" (as did we all) but he concocts some nonsense about him saying "to blave" and then makes up his own definition of the word.

There's absolutely no indication that this word means "to bluff" in English, old English or any other language known to Google.

Billy Crystal did quite a bit of improvisation in this scene:

From the first shot in which cantankerous Max appears, poking his head through a wooden peephole in the door (very much like the doorman who greets Dorothy when she and her friends reach Oz), he began ad-libbing.

For three days straight and ten hours a day, Billy improvised thirteenth-century period jokes, never saying the same thing or the same line twice.

Elwes, Cary; Layden, Joe. As You Wish: Inconceivable Tales from the Making of The Princess Bride (Kindle Locations 2245-2248). Touchstone. Kindle Edition.

In the process, the explanation for this bit seems to have gotten a bit garbled.

In the book, Miracle Max explains it this way: A corpse can't make an f sound, so it comes out as a v sound instead. So instead of "true love", the corpse was saying "to bluv", by which was meant "to bluff", with the f softened to a v.

"Tr...ooooo...luv..."

Fezzik grabbed onto Inigo in panic and they both pivoted, staring at the man in black, who was silent again. " 'True love,' he said," Inigo cried. "You heard him—true love is what he wants to come back for. That's certainly worthwhile."

"Sonny, don't you tell me what's worthwhile—true love is the best thing in the world, except for cough drops. Everybody knows that."

"Then you'll save him?" Fezzik said.

"Yes, absolutely, I would save him, if he had said 'true love,' but you misheard, whereas I, being an expert on the bellows cram, will tell you what any qualified tongue man will only be happy to verify—namely, that the f sound is the hardest for the corpse to master, and that it therefore comes out vuh, and what your friend said was 'to blove,' by which he meant, obviously, 'to bluff'—clearly he is either involved in a shady business deal or a card game and wishes to win, and that is certainly not reason enough for a miracle. I'm sorry, I never change my mind once it's made up, good-by, take your corpse with you."

Goldman, William. The Princess Bride: S. Morgenstern's Classic Tale of True Love and High Adventure (pp. 288-289). Houghton Mifflin Harcourt. Kindle Edition.