Are binary options a scam?
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Binary options are not inherently a scam, but the industry is, for various reasons, rife with fraudulent activity, and many scammers are using the popularity of binary options among non-professional traders to lure in victims.
It is also true that while not inherently a scam, binary options are very high-risk due to the “all or nothing” model. When trading binary options, investors predict whether an asset’s price will rise or fall over a short period. If they are correct, they make a fixed profit, but if wrong, they lose their entire investment. If you for instance had purchased publicly traded stocks instead, you could have sold them if the market started to go against you – realizing a small loss instead of losing 100% of your investment.
While it is technicaly possible to find long-term binary options, short-term binary options dominate the market, and it is possible to find super-short binary options where the lifespan is just a minute or even less. The ability to either make a profit in a very short timespan or lose the entire amount make these short-term binary options very similar to short-term gambling, e.g. playing slot machines or betting at the roulette table. Therefore, there same potential for gambling addiction exist – and it can be more difficult for the individual to realize what is happening since binary options are marketed as “investing” or “trading”, and traders want to believe that they are making smart and well-informed market decisions rather than “putting everything on red at the roulette table”. This is another contributing reason to why many countries have either banned binary option or classified them as gambling products instead of investment products.
In many countries around the world, brokers are no longer permitted to offer binary options to non-professional traders.
Good Things to Know About Binary Options and Scams
Due to the high-risk nature of binary options, the similarities to gambling, and the prevalence of scams, binary options have been banned in many countries and authorities. Some have banned them outright, while others have only banned brokers from offering them to non-professional traders. There are also countries where they have been classified as gambling products and therefore fall under the nation´s gambling laws.
Regulatory bodies such as the UK’s Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA), have taken action to protect retail investors from the risks of binary options, prohibiting their sale, distribution, and promotion to retail clients.
Since many of the more serious authorities around the world – the ones know for having stringent rules in place to protect investors – have banned binary options, it has become very difficult for retail traders to find binary option brokers regulated by strict authorities. If you go looking for binary option brokers, you will find that most are either regulated by a very lenient authority, or exist in a legal haze where they might be based in one country, operate from another, and have a license from none. When brokers and platforms operate without proper regulatory oversight, it becomes even easier for scammers to defraud traders.
We are also seeing a development where serious brokers who used to offer binary options in the past have removed binary options from their offering, since they do not want to be associated with the bad reputation of binary options, or risk looking bad in the eyes of serious regulators such as ESMA, ASIC, and the UK FCA.
Misleading and aggressive marketing of binary options to retail traders
Binary options brokers and platforms are also known for their aggressive marketing – especially when it comes to targeting non-professional and inexperienced traders. They can for instance attempt to lure in new traders using deliberately complex welcome bonus promotions with terms that would be illegal in most countries even if the underlying financial product was allowed.
Unfair and vague terms and conditions
Using incorrect market data
Some fraudulent brokers use incorrect market data to manipulate traders. For instance, they can ensure that a trader loses an important trade that would have been costly for the broker to pay for.
Fighting against the broker when you realize you have been tricked will be difficult if they are not regulated by any reputable authority that you can bring your complaint to.
Identity Theft
Sometimes retail traders are willing to take a risk with a binary options broker, thinking that the worst case scenario is losing the $50 or maybe $100 of their first deposit. Regretably, this is not the case, as fake binary options platforms are sometimes used by scammers involved in identity theft.
Traders know that they need to provide a lot of personal data to register with any kind of broker, and that brokers also need to verify a traders identity and carry out Know Your Customer (KYC) checks to prevent fraud and comply with the rules against money laundering, terror financing, etcetera. This is of course great for those who want to steal your identity, since they can pose as a binary options trader and just ask you for all this information, including a photo of your ID/passport and copies of utility bills in your name. Some will even require you put a credit card on file with them “to comply with regulations”.
Conclusion
While binary options are a legitimate financial product, their simplicity and high risk have made them a very popular tool for scammers and disreputable brokers looking for victims.
Many of the serious authorities have banned brokers from offering binary options to retail traders, making it even more difficult for traders to find serious and trustworthy brokers.
Given the prevalence of fraud, many traders and experts advise staying away from binary options altogether. If you are a retail client interested in derivatives, you can for instance take a look at Contracts for Difference (CFDs) instead and see if they may fit your trading needs. There are many reputable brokers and platforms, regulated by serious authorities, that offer CFDs for both professional and non-professional traders.