Binary options are a type of financial instrument that allows individuals to bet on whether the value of an underlying asset, such as a stock, bond or even bitcoin, will be higher or lower after a specific pre-determined time period. If you are correct you receive a financial payoff. If you lose, you lose your entire invested amount.
When browsing through Facebook, you will likely see ads from online brokerages that offer bitcoin binary options trading and claim that it is a great way to make money off the boom in bitcoin. Alternatively, you will also find a lot of individuals on Facebook groups encouraging people to sign up for binary options trading claiming that it is a great way to make money online. However, nothing is further from the truth.
Not Real Investment Products
Binary options are being marketed as easy-to-use investment products that allow you to make money online by simply betting on whether the price of an asset will go up or down within the next five, ten, or thirty minutes. However, what binary options brokers do not share in their aggressive marketing campaigns is that the odds are not actually 50/50. Instead, they are much worse as the binary options market moves with the price of the underlying asset.
Say, for example, you want to bet $100 on the price of bitcoin closing higher within the next five minutes as the price of bitcoin has just ticked up a little and you think it will continue to rise. In that case, the price of a bitcoin binary option could be something like 52/48. Meaning that if you want to “go long” and buy a call binary option, your payoff will be 0.48 * 100 so you can earn $48 if you end up correct. Should you be incorrect, however, and the price of bitcoin drops below the strike price after the five-minute period, then you will lose your invested $100.
Simple maths tell us that if you play a game that gives you less than a 50 percent chance of winning over and over again you can only lose. Especially, in a game with a binary payoff where the potential winnings are always less than the potential losses.
As binary options have been falsely marketed as investment products when they are really a form gambling, they have been banned in Israel, Canada, and Belgium. Furthermore, the U.S., France, and the Netherlands have fined several binary options brokers for their consumer-harming activities.
Bitcoin is Too Volatile to Bet on Short-Term Price Movements
Should you decide to try binary options regardless because you like gambling, you should know that bitcoin is more volatile than traditional asset classes such as stocks and bonds, which makes it impossible to predict its short-term price movements.
The price of bitcoin is very news-driven and you cannot predict what headlines will hit the newswires next. So placing a bet on whether the price of bitcoin will be higher or lower within the next five or ten minutes is a very risky affair that will likely end up with you losing your money.
Binary Options Trade on Fictitious Markets
Finally, it is important to note that binary options do not trade on the actual price of the underlying asset. Instead, binary options brokers create their own markets. In other words, you are “trading” on fictitious markets that the binary options brokers control. You are not betting on the actual price of bitcoin, a real stock index or the price of gold. Instead, you are betting on the price of a fictitious underlying market that is supposed to replicate the price movements of the actual asset.
It is, therefore, no surprise that binary options are banned in numerous countries and that the majority of users who try binary options platform end up losing money.
If you have seen the flashy looking online ads that recommend binary options as a great way to make money trading bitcoin, don’t click on them. You can only lose money with binary options over the long run!