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Eight years ago, I wrote an article that was republished on the Forbes magazine website. Over two million people have read it, more than any other column I have written over the years. The title of the story was “Don’t Gamble on Binary Options,” and it still shows up on the first page when you do a Google search on the subject. Despite all the warnings and financial horror stories of investors losing all their money, the binary option scams are still a problem, according to the Ombudsman for Banking Services and Investments (OBSI).
Binary options involve placing a bet on whether a specific stock, commodity, index, currency, or whatever will go or down within a specific period of time (usually very short). If you guess right, you win. If you don’t, you lose. Think of it as the financial equivalent of betting red or black on each turn of a roulette wheel. The attraction is that you don’t need to invest a lot of money, it’s easy to understand, and that it can be done on line from your home.
The disadvantage? Most people lose money (sometimes a lot), and some of the sites that promote this activity are scams. According to Wikipedia, the FBI estimates that these scam sites steal about $10 billion a year from unsuspecting investors.
My original column was based on an email I received from a professional online poker player who, ironically, was trying to convince his father to stop investing money in binary options. He wasn’t having much luck.
“The problem is he feels he is at a great advantage, citing his ability to read a bunch of charts, follow news, etc.,” the reader said. “He is a smart man, a former lawyer, and has been following stocks for years, but I feel that he may be overestimating himself here. I’ve looked into online binary options trading a bit, and it seems to me that the consensus is that very few people outside of professional traders can beat the trading sites consistently for good money.”
I did my own research after receiving this note and came to the same conclusion. There is no way to accurately predict how any investment vehicle will perform in the next 30 minutes, and you must win more than 50% of the time just to break even. Add to that the addictiveness of this form of gambling (because that’s what it is), and it all equals financial ruin.
As I said, that article was written eight years ago. I bring it up now because of a bulletin issued recently by the OBSI. It notes that while the sale of short-term binary options has been banned in Canada, investors can still buy them online through websites based in other jurisdictions. The message is: Don’t do it!
“Binary options are a very high-risk investment that Canadians should avoid,” the bulletin says. “At best, they are a high-risk investment strategy suitable only for sophisticated investors who are willing to lose their entire investment. At worst, the investments may be frauds designed to take advantage of unwary investors.”
OBSI notes that securities administrators have been working with credit card companies, tech firms, and advertisers to prevent the sales of binary options in Canada.
“However, because binary options are both a global and digital investment, a ban is challenging to enforce,” the bulletin said. “Canadians unaware of the volatile and often fraudulent nature of these products may continue to purchase them over the Internet.”
OBSI goes on to warn that investors who disregard the warnings and then try to make claims for unwanted charges on their credit cards are out of luck.
“We have received multiple complaints from investors who used their credit card to purchase binary options. These investors later disputed credit card charges related to these transactions. They believed that because they did not receive the promised services (such as the ability to withdraw their investment capital) that the issuing credit card company should allow a chargeback or reversal of the charge.
“In the cases OBSI investigated, the chargeback was refused by the credit card company. We found that the banks involved were not at fault for the failure of the chargeback request because they followed the normal chargeback policies and procedures. It was the policies of the payment card network operators that prevented the consumer from recovering any disputed charges. As a result, we could not recommend that the banks compensate the cardholders. We identified this as a systemic risk and reported it to the Financial Consumer Agency of Canada.”
The message couldn’t be clearer. Binary options were a bad investment when I wrote my original column eight years ago. They still are today.
You can read the original article on the Forbes website. Go to the OBSI website to read the bulletin: www.obsi.ca.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.
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Notes and Disclaimer
© 2018 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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