A very popular topic on various personal finance blogs these days is the issue of binary options. Binary options exploded massively during the last year and went to become a popular subject on many websites and forums.
In this post I’ll try to address the issue of binary options and try to give an answer to most of the questions that relate to this form of online trading.
How do binary options work?
In this form of online trading you will be required to predict the future movement of financial assets. Assets could be anything such as gold, silver, stocks or indices. Essentially, you will have to predict if the value of these assets will move up or down during a given time period.
Once you make a prediction, you will have to purchase a binary options contract that allows you to invest a certain amount of money into this prediction. If your prediction will come true then you will win and will get your investment back plus a certain commission.
If, however, your prediction will not come true, then you will lose all the money that you have invested.
So, binary options are actually like betting?
Indeed, based on the above binary options are in fact much closer to betting rather than investing. In binary options you will not be investing in the traditional sense of the word, as you will not be purchasing or selling actual assets bit merely bet on their future movement.
The biggest defect of the current binary options business is that this form of trading is being marketed as a legitimate form of investment. This is misleading since as explained above you will actually not invest any penny, as you will not be purchasing any assets.
So, essentially binary options are a scam?
Binary options are not a scam per se. There is nothing wrong or illegal about betting on the future movement of financial assets. However, most of the companies and websites that offer binary options trading are dishonestly claiming that they are offering investment services.
This leads to many naïve people believing that they will have real chances to make consistent profits, as the decisions they will be making in binary options trading will be based on objective information and facts and not on pure luck and chance.
However, since binary options are at this moment merely a form of betting, making accurate predictions is not possible as the results always depend on luck and random chance.
The majority of the websites that at this moment offer binary options are not regulated or are being run by obscure people from various remote islands. For example, here on this webpage we can read that most binary options brokers are regulated in Cyprus, which is known as an international tax heaven with very lax laws and regulations.
How things might evolve in the future
Basically two main aspects would have to change in the future about this business for it ever to be considered completely legit. First, binary options would have to cease to be a type of betting and instead become a legitimate form of trading.
This is possible if companies offering binary options begin to offer options with long expiration times. An expiration time is basically the deadline until which your prediction about the movement of an asset will have to come true.
At this moment the vast majority of binary options websites only offer options with expiration times of up to a few minutes, maximum an hour. Such a time frame is simply not enough to make accurate predictions. This is the reason binary options are a form of betting today that depend on pure luck and chance rather than real investing.
If expiration times would be long, such as several days and even weeks, then people would have a fair chance to make accurate predictions, as predicting the future movement of a financial asset over a long period of time is perfectly possible.
The second is that governments would have to start implementing clear rules and regulations on how binary options are traded. Right at this moment the market is completely unregulated in most countries meaning that companies can basically do anything they want and get away with a large number of shady and unethical practices (such as claiming that today’s binary options are a form of investing rather than betting) without any consequences.
Once these two conditions will be met binary options would become a legitimate form of investing and trading. Today however the business is still far form these two goals. So, if you’ve ever been tempted to try binary options you might as well just go to Vegas instead and “invest” your money in blackjack.