Binary Options is relatively one of the newer asset trading services out there, but it certainly has gathered tremendous following over the last few years. Many retail traders are enticed into trying out this so-called ‘investment’ vehicle primarily because of its simple premise – which is a matter of predicting if the price will go up or down after a preset time frame.
The problem with Binary Options trading is that it is prone to fraud and corruption. There is little transparency when it comes to transactions. Unregulated broker platforms, who are ready to prey upon unknowing traders, abound the internet. To an uninformed individual, there is no way of telling if these organizations, hiding behind their investment broker mask as a facade, are scammy or not.
The integration of blockchain technology in a binary options trading framework seeks to eliminate these concerns.
One such platform is Bulls vs. Bears, which uses Tronix (TRX) crypto as the main digital currency for making trades. The platform is set to roll out its services in September. Traders who are interested to try out their early access beta trading are invited to do so by going to their site and have the chance to get free 500 TRX.
Binary Options Explained
Binary options, as the name suggests, is a trade setup with only two possible outcomes. Either a trader closes a transaction ‘in the money’ or ‘out of the money.’ Essentially, a trader predicts if the price of an asset or option will close above or below its beginning price after the predetermined expiry time.
At the time of expiry, the trader receives a payout or loses their investment based on if their prediction is correct or not. The profit or loss is automatically credited or debited to the trader’s account when the trade expires.
As an example, let’s say that a trader enters a $100 dollar contract and predicts that Apple Inc. stock will end up above $220 after 30 minutes. If the prediction is correct at the end of the expiry time, he or she receives a payout, which usually ranges from 60% to 90% of the original investment. If not, he or she loses all the money invested.
The Pitfalls of Binary Options
Although binary options as a product is a legitimate trading service and widely offered around the world, the problem lies with the unregulated brokers who are practically free to do whatever they want to keep their profits high.
In the US, the trading regulations are set by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). However, the majority of binary options broker operates outside the US, and thereby outside of the US jurisdiction. Other countries or regions also have their respective regulating bodies, but the fact remains that there are still fraudulent brokers in operation.
Some of the common issues encountered by scammed users are:
- Price data manipulation – this is a common underhanded tactic used by untrustworthy brokers to influence the result of a trade.
- Withdrawal issues – the broker is essentially the safe keeper of your fund, and as such, they have the power to delay or block your withdrawal. Some brokers set a minimum completed trades before a user is allowed to withdraw funds, which essentially locks the fund.
- Funds are not kept safe – unregulated binary options brokers do not keep the client’s fund in a trusted account, which is the standard set by most regulating bodies. This setup does not allow third-party organizations to monitor transactions to ensure fair play.
- Trading is not Provably Fair – As binary options is basically a trade bet against the broker/platform, the result of each trade is impossible to be verified for fairness. A provably fair algorithm is usually in place for gambling and casino sites to ensure fairness. For this setup, however, no such system is in place.
- No claims if the company runs away or shuts down – the worst situation that traders face on non-regulated platforms is that they can lose all their money if the company goes broke or decides to run away with their money.
- Platforms are prone to hacking – cybersecurity threats are another type of issues being faced by unregulated broker platforms as they usually don’t invest in top-caliber security features for their system.
Blockchain Addresses All Issues
The creation of blockchain technology has paved the way to some revolutionary applications, most prominent of which is its support for cryptocurrencies transactions. But aside from that, the technology has huge application potential in asset trading (i.e. stocks, commodities, foreign exchange, digital currency trading, etc.).
In a whitepaper authored by Gary Luo and Asonganyi Derick, they outlined how blockchain changes the binary options framework entirely and converts it to a more transparent and fraud-free system.
A blockchain-based binary options framework eliminates the issue of price manipulation because all transactions are entered into a smart contract that is stored in blockchains, which are immutable in nature. Further, the new framework is provably fair; transactions can be reviewed and verified for fairness anytime.
Another good thing is that trader funds are not kept by the broker themselves as all data are decentralized. Rather, traders enter transactions using their own crypto wallet and all profits or losses are instantaneously taken in or out of their wallets. This system safely leaves the user to manage their funds as freely as they want.
Finally, the integration of blockchain makes the trading framework virtually impregnable to cyber attacks.
The idea of blockchain in binary options trading is only at its infancy stage, with the first platform/brokers having only begun beta testing back in 2017. However, it is already changing the corrupt nature of binary options trading big time. As more and more platforms follow suit, this new framework should do very well in creating a fraud-free environment for traders to join in.