Well, I'm glad to know that it is not something obvious. Hare are a couple more pictures.
Yes it is below the bottom of the threads and yes the plug was properly seated, looks the same as the 5 other plugs in terms of colour and there is no indication that the electrode was touching the "washer", so the "washer" must be well below the bottom of the threads. The hole is too small for the electrode to protrude through it. Yes then engine ran fine, although I only put about 200 miles on it between buying it and putting it away for the winter.
In the above pictures you can see the piston crown through the hole, the pictures in my first post were with the piston at or near the bottom of the stroke... I turned the engine so it is at the top. No the "washer" does not move, the silver ring around the outside edge of the "washer" looks to me like it could be solder or welding.
I think the fact that piston crown is visible eliminates the possibility of it being reflections. I have other pictures, plus what I saw as I moved the borescope around, that leave me certain that that is the piston we are seeing through the hole.
So, one far out explanation that came to my wildly imaginative mind was that someone was strengthening the head... perhaps a crack around the spark plug hole. That seems ridiculous even to me to do that inside the cylinder.
One other interesting fact, when I did the compression test this cylinder was slightly higher (5%) than the others. I imagine having hardware taking up space in the combustion chamber would contribute to that.
It would be very interesting to drop the engine and remove that head... but if it continues to run well I'm not going to do that.
Anyway, the plan is to get it back together and start it. If it still runs like before it will go back on the road. I may keep my eyes open for a good used engine just in case...
EDIT - I just saw Gilles' question... I did pass a steel rod through the hole and it went a couple of inches before hitting the piston, this was when the piston was at the bottom of the stroke.