Unlike the real sector made up of governments, non-financial companies, individuals, etc., the modern financial system mainly groups financial institutions and stock markets.
This system aims to relate the supply (savings) and the demand (investment) of capital. It helps investors to bid a price commensurate with the price risk when buying an asset.
Modern finance is the heart of global economies and capital markets. It’s continuously reshaping, particularly with the advent of the cryptocurrency market and blockchain technology.
Finance is the central element of the economic system.
Historically, financial activities appear at the same time as trading activities. Money trade, production, and the exchange of goods have always been closely linked.
Modern finance is a concept that is sometimes disparaged, often unrecognized, and largely caricatured. However, it turns out that finance is one of the central elements of the capitalist economic system, making it possible to finance wealth-creating investment projects. Some are prone to attribute to it all the ills from which modern societies suffer.
This bad reputation comes from the fact that finance, although essential to the functioning of capitalist markets, is a particularly favorable place for the outbreak of crises. The prices of financial assets are, in fact, purely subjective insofar as they result only from anticipations and visions of the future.
These expectations can tip sharply and prices with them. Crises periodically purge the financial system. They correct actors’ expectations regarding the value of the securities they hold because their expectations always tend to be excessive.
Modern financial system: main players
Whether it is saving, borrowing, investing, or buying and selling using credit cards, checks, or electronic money, most business activity is conducted through the financial system.
It consists of a set of financial institutions exchanging funds directly (commercial credit, over-the-counter transactions, etc.). Or indirectly through marketplaces (stock exchange).
Major players in the financial system include central banks, commercial and investment banks, insurance companies, brokers, stock exchanges, traders, trading platforms, clearinghouses, etc.
All these actors intervene by respecting the regulations set by the regulatory authorities.
Bitcoin – a rebel in the modern financial system
Cryptocurrency emerged as a reaction to the traditional financial system. It happened at the moment when the world was experiencing one of the most serious crises in its history, in 2008.
Bitcoin initially wanted to bypass the financial system, but eventually, it and its avatars became more integrated. Certainly, financial institutions like the European Central Bank remain very cautious about the future of this cryptocurrency.
The American policeman of the financial markets is also dragging feet. With each new request, the SEC emphasizes that Bitcoin trade takes place on mostly unregulated platforms. And as such, it is likely to be manipulated, with a high risk of a bubble.
Regarding unregulated platforms, if you venture into online trading these days, be it foreign currencies, cryptos, or stocks, you should absolutely check broker review to make sure the company is reputable.
New financial products based on Bitcoin or other cryptocurrencies are also appearing. At the end of 2017, well-established stock market platforms, such as the Chicago board options exchange (Cboe), offered Bitcoin futures contracts, giving it a new degree of legitimacy. And investment funds like Swissborg, for example, offer blockchain-based asset portfolios.
The big Wall Street banks are more reserved. Goldman Sachs does not yet offer its own Bitcoin-related products. As for the boss of JPMorgan Chase, he has repeatedly been skeptical about the potential of cryptocurrency. In 2017, he even qualified this currency as “fraud.”
Yet the most enthusiastic investors are impatiently awaiting the creation of an index fund backed by Bitcoins, which faithfully replicates the movements of the virtual currency. That would boost investments, they hope.