Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type. Fungible assets simplify the exchange and trade processes because fungibility implies equal value between the assets.
Key Insights
- Fungibility is the ability of a good or asset to be readily interchanged for another of like kind.
- Goods and assets such as cars and houses that aren’t interchangeable are non-fungible.
- Money is a prime example of a fungible asset because a $1 bill is easily convertible into four quarters or 10 dimes.
- Unique items such as cars, houses, or artwork are non-fungible.
- The line between fungibility and non-fungibility of some assets can be murky.
Deep Dive into Fungibility
Fungibility implies that two things are identical in specification, making individual units mutually substitutable. Specific grades of commodities such as No. 2 yellow corn are fungible because it does not matter where the corn was grown; all corn designated as No. 2 yellow corn is worth the same amount. Commodities, common shares, options, and dollar bills are all examples of fungible goods.
Cross-listed stocks, or the shares of stock listed on multiple exchanges, are still considered to be fungible. The shares represent the same ownership interest in a firm whether they are purchased on the New York Stock Exchange or the Tokyo Stock Exchange.
Fungibility is commonly associated with finance but it’s also found in other disciplines, such as quantum physics. Cryptocurrencies are generally considered to be fungible assets, but some are unique and not interchangeable, known as non-fungible tokens (NFTs).
Fungible vs. Non-Fungible Explained
Fungible assets are of like kind, making them interchangeable. Non-fungible assets, on the other hand, have unique characteristics that mean they cannot be replaced by another.
Money is another example of a fungible asset. It doesn’t matter to Person A if they are repaid with a different $50 bill if Person A lends Person B a $50 bill. It’s mutually substitutable. Person A can be repaid with two $20 bills and one $10 bill and still be satisfied because the total equals $50.
Conversely, it is unacceptable for one person to borrow a car from another and then return a different car, even if it is the same make and model as the original. This is an example of non-fungibility. Other examples of non-fungible assets include:
- Diamonds: Each diamond varies in cuts, colors, sizes, and grades, making them non-interchangeable.
- Baseball cards: Each card has unique qualities such as rarity that add or subtract from its value.
- Real estate: Each house experiences different levels of noise and traffic, is in varying states of repair, and has unique views, even on a street of identical houses.
Nuances and Special Considerations
The line between fungibility and non-fungibility may be thin. Gold is generally considered fungible because one gold ounce is equivalent to another gold ounce. However, when otherwise fungible goods are given serial numbers or other uniquely identifying marks, they may no longer be quite as fungible. Adding unique numbers to bars of gold, collectibles, and other items makes them non-fungible.
For example, the Federal Reserve Bank of New York offers gold custody services to central banks and governments around the world by storing gold bars in its underground vault. All the gold bars deposited into the vault are weighed and inspected to confirm they match the depositor instructions. The exact bars deposited at the New York Fed are the ones returned upon withdrawal, making these types of gold deposits not fungible.
Important Definitions
What Is the Meaning of Fungible?
Fungible means that an item, asset, or commodity can be replaced with something of like kind when fulfilling a contract or paying a debt. Interchangeable goods are fungible; unique goods are non-fungible.
Why Does Fungibility Matter?
Fungible assets facilitate a flow in trade and exchange processes because they are essentially equal in value. This can be a factor in healthy economies. A decrease in value in one sector or country can be offset by a rise of a fungible asset in another.
What Is a Fungible Issue?
A fungible issue is a bond that replicates one that has been previously offered by the same company. While its terms are the same, the yield will most likely be different.
What Are Non-Fungible Tokens?
Non-fungible tokens (NFTs) are assets that are not interchangeable. They are often digital and can include assets such as music, images, videos, and some forms of cryptocurrency. Purchasing an NFT gives you rights to ownership, but this right does not necessarily translate to outright ownership of the asset.
Conclusion
Fungible assets are identical, making them seamlessly substitutable. Stock shares listed on multiple exchanges are examples of fungible assets because they provide consistent ownership interest regardless of the buyer or purchase location. This quality strengthens the reliability of such assets, which can be an important consideration for the average investor. Non-fungible assets, in contrast, are unique in some way, precluding substitution. Houses, gemstones, and artwork are prime examples of non-fungible goods.
Related Terms: commodities, cross-listed stocks, fungible issue.
References
- Federal Reserve Bank of New York. “Gold Vault”, Select Storing the Gold.
- Congressional Research Service. “Non-Fungible Tokens (NFTs)”, Page 1.
