Hi guys! In this article I will give my personal opinion regarding this kind of trendy “investing” platforms which promises huge returns in a short period of time with no financial background required.
What’s this thing called Binary Options?
This is what Wikipedia says:
A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all. The two main types of binary options are cash-or-nothing binary option and a asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security.
First off, let’s clarify one thing: Binary Options are not trading, they are just gambling. Why do I say this? Let me explain the difference:
In a nutshell, when you trade you buy and sell a financial product through a broker (an intermediary between you and the market) and you can hold these products you bought anytime you want before selling them out (preferably at a higher price of course). Thus, your profit is calculated by the difference between the buy and sell prices minus your broker commission.
On the other hand, in Binary Options you do not own any financial product at all, there is no trade. Here you have to predict the next direction of the market (up or down) betting against the house. Also note that the betting format (all-or-nothing) is the same one you can find in a casino or on other gambling websites like bet365, betfair or 888sport. And trust me, the quote “the house always wins” it’s not just a cliche.
But let’s suppose you are stubborn enough to still want to put your money in there. Let me try to change your mind.
Trying to crack the game
Yes, their average payouts are as high as 70–90% (not bad, huh?), but what happens if you bet £50 two hundred times with a payout of 80% and your strategy succeed 54% of cases (let’s be optimistic). This would be the formula:
Ops! Looks like even with a 54% of accuracy you’d still lose money. So which winning rate is needed to –at least– not go bankrupt? This would be the formula:
Note that this 55.55% is needed just to make a 0% profit, so you’d have to overcome that accuracy rate to see some benefit.
But even if you are a smart guy who knows how to tune Deep Learning models with fancy custom loss functions your odds are still very poor. In the next section I’ll explain why.
How they’ll scam you anyway
Then, is it possible to beat them out? It is definitely not a piece of cake, but I think it is. But don’t miss the point, the question here is: will they let you win? I seriously doubt it. We can find a similar situation gambling in a casino. Can a blackjack player beat the house? Sure, by using methods like card counting for instance, but we all know what happens if they find it out…
In game theory, this is called a zero-sum game, which basically means that the interest of both players (yours and the casino’s) depends and confronts one with each other. Thus, if you win they lose and vice-versa.
So these are just some ways they can still win even if you are nerdy enough to crack the game:
1. Contract duration restrictions
You are not able to bet whether long-term or short-term depending on the currency and the date. That could definitely interfere in your strategy in a dramatic way.
2. Time restrictions
They do know very well that when a critical market event (which might affect the volatility) is going to be released, your possibilities will increase. So they can suddenly freeze up their platforms during these intervals(“ops! 404 not found”), increase its minimum contract duration, or even dwindle their payouts accordingly. In other words: bye bye sentiment analysis.
3. Data quality
These are some major issues I’ve found so far:
- Each platform provides their own financial data. So don’t expect to be able to compare it with other sort of services like Google Finance or Yahoo Finance, because they won’t match at all. Where does their data comes from then? Nobody knows. How do you know they don’t slightly modify the tick streaming for their benefit? You just can’t know, you have to trust them.
- Their tick streaming contains tons of gaps. How do we know these gaps are caused by an IT failure? What happens with all those contracts affected?
- Generally, they don’t provide the volume, which is a very important factor in terms of determining the market behaviour.
4. Payout calculation
Note that the payout it is not just a random number, it is calculated based on their prediction system; so, the higher the payout, the closer are the chances to become a coin flip. Therefore, it’s not as simple as winning 56 out of 100 times, because if the average of those winning payouts is lower than 80% you still lose money.
The last but not least: they will put buts to prevent you to withdraw your money. Whether they say you have entered your personal data incorrectly, or they force you to create a new ewallet service, or you have not reached their minimum withdrawal amount… the process can become a nightmare. Plus, they will charge you an extra withdrawal commission.
They can even argue that you have been exploiting a vulnerability or IT failure of their platform and so they keep all your money back without any further proof or explanation. Trust me, it happens.
The bottom line
To sum it up, I think there are enough reasons to keep your money far away from these gambling platforms, so don’t waste your money and your time. Instead, I recommend other legit alternatives like crowdlending or ETF, for instance. You can check the platform comparison to find the one which suits your investor profile.
Have you ever been scammed with Binary Options? Use the comments section below to share the experience with other investors!