Fungibility

Fungibility: What it Means and Why it Matters

Key takeaways
* Fungibility means an asset can be exchanged for another identical unit without loss of value or function.
* Money, standardized commodities, and widely traded shares are typical fungible assets.
* Unique items—artwork, individual houses, collectible cards—are non-fungible because each unit has distinguishing characteristics.
* Cryptocurrencies can be fungible or non-fungible; NFTs are examples of non-fungible digital assets.

What is fungibility?

Fungibility describes whether one unit of an asset can be substituted for another of the same kind. If units are interchangeable and equivalent for settlement or trade, the asset is fungible. If each unit is unique in a way that affects value, the asset is non-fungible.

How fungibility works in finance

When assets are fungible, markets and transactions are simpler because participants need only know the type and grade of the asset, not the identity of individual units.

Common examples of fungible assets:
* Currency (one $20 bill is effectively the same as another $20 bill).
* Standardized commodities (e.g., a specified grade of corn or crude oil).
* Publicly traded shares that represent the same ownership stake, even if bought on different exchanges.
* Contracts like many options or bonds that share identical terms.

Fungibility enables pooling, netting, and easy settlement because units can be treated as interchangeable.

Fungible vs. non-fungible: practical examples

Fungible
* Cash and coins
* Commodity grades (e.g., No. 2 yellow corn)
* Identical shares of the same class in a company

Non-fungible
* Real estate (each property has unique location, condition, and features)
* Original artwork (provenance, creator, condition affect value)
* Collectibles such as graded trading cards or unique diamonds
* A specific car when ownership of that exact vehicle matters

A useful contrast: repaying a $50 debt with different bills is acceptable (fungible), but returning a different car in place of one borrowed is not (non-fungible).

Special considerations and edge cases

The boundary between fungible and non-fungible can blur:
* Serial numbers, ownership marks, or custodial arrangements can make otherwise identical items distinguishable. For example, gold is typically fungible by weight and purity, but when specific bars are individually tracked in custody, those particular bars are treated distinctly.
* Same-grade commodities from different origins are often interchangeable for trading, but real-world delivery conditions, legal claims, or provenance requirements can reduce interchangeability.

Cryptocurrencies and non-fungible tokens (NFTs)

• Many cryptocurrencies (e.g., one bitcoin for another bitcoin) are fungible by design.
• Non-fungible tokens (NFTs) are blockchain-based tokens that represent unique digital items or rights (digital art, music, collectibles). Each NFT is distinct and not interchangeable one-for-one with another NFT.
• Owning an NFT typically grants a tokenized proof of ownership or association with a digital asset, but it does not always transfer copyright or exclusive physical ownership unless explicitly specified.

What is a fungible issue (in bonds)?

A fungible issue refers to a new bond issuance that has the same terms as an earlier issue by the same issuer, allowing the new bonds to be interchangeable with the existing series for trading and settlement. Yield or pricing may still differ when traded.

Why fungibility matters

• Liquidity: Fungible assets are easier to buy, sell, and price, which improves market liquidity.
• Efficiency: Interchangeability reduces complexity in settlement, custody, and accounting.
• Risk management: Fungible instruments make hedging and portfolio rebalancing more straightforward.
• Valuation: Non-fungible assets require individualized valuation because unique attributes drive value differences.

Frequently asked questions

Q: Can an asset change from fungible to non-fungible?
A: Yes. Adding unique identifiers or custody arrangements can make previously interchangeable items distinct.

Q: Are all digital assets non-fungible?
A: No. Many digital currencies are fungible; NFTs are a specific class designed to be non-fungible.

Q: Does fungibility affect investment decisions?
A: Yes. Fungible assets tend to be more liquid and easier to price, while non-fungible assets may offer uniqueness-driven returns but require more due diligence and individualized valuation.

Bottom line

Fungibility describes whether units of an asset are interchangeable. It is a fundamental concept shaping liquidity, pricing, and the mechanics of trade across currencies, commodities, securities, and digital tokens. Recognizing whether an asset is fungible or non-fungible helps investors and market participants choose appropriate strategies for trading, custody, and valuation.