# Understanding Fungibility in Finance and Its Importance

## What Is Fungibility?

Fungibility refers to the ability of assets to be interchangeably used, simplifying trade and exchange. Examples include money and commodities like corn, where identical units can be substituted without loss of value or function. By understanding this concept, readers can grasp its significance in economics and finance.

### Key Takeaways

*   Fungibility refers to the ability of an asset to be exchanged effortlessly with another item of the same kind and value.  
    
*   Money is a prime example of a fungible asset, which can be exchanged easily for different denominations without losing value.  
    
*   Non-fungible assets, like houses and artwork, are unique and cannot be exchanged one-to-one due to their distinct characteristics.  
    
*   Cryptocurrencies can be fungible or non-fungible, with non-fungible tokens (NFTs) representing unique digital assets.

![Fungibility: The ability of a good or asset to be readily interchanged for another of like kind.](https://www.investopedia.com/thmb/8xtGgGh53yEnaTupXH56Z6TAiBI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Fungibility_final-145bd101a9fa4c3ea09f15f5add9a020.png)

*— Investopedia / Michela Buttignol*

## How Fungibility Works in Finance

Fungibility implies that two things are identical in specification. Individual units can be mutually substituted. Specific grades of commodities such as No. 2 yellow corn are fungible because it does not matter where the corn was grown. All corn that's 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](https://www.investopedia.com/terms/c/cross-listing.asp), 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 you purchased them on the New York Stock Exchange or the Tokyo Stock Exchange.

Fungibility is mainly linked to finance but is also in fields like quantum physics.

> **Important**
>
> Cryptocurrencies are generally considered to be fungible assets but some are unique and not interchangeable. They're non-fungible tokens (NFTs).

## Comparing Fungible and Non-Fungible Assets

Fungible assets are of like kind, which makes them interchangeable. Non-fungible assets, on the other hand, have something unique about them that means one cannot be replaced by another.

Money is another example of a fungible asset. It doesn't matter to Person A if they're 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's not acceptable for one person to borrow a car from another person 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. Cars aren't fungible with respect to ownership, although the gasoline that powers the cars is. Other examples of non-fungible assets are:

*   **Diamonds**: Individual diamonds have different cuts, colors, sizes, and grades, so they're not 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 of surrounding areas, even on a street of identical houses.

## Special Considerations in Fungibility

The line between fungible and non-fungible can be thin. Gold is generally considered to be fungible because one gold ounce is equivalent to another gold ounce. However, when fungible goods get serial numbers or unique marks, they may not be as interchangeable. Adding unique numbers to bars of gold, collectibles, and other items makes it possible to distinguish them, which makes them non-fungible.

For example, the Federal Reserve Bank of New York stores gold bars for [central banks](https://www.investopedia.com/terms/c/centralbank.asp) and governments worldwide. Each gold bar in the vault is weighed and checked to match depositor instructions. The exact bars deposited to the New York Fed are the exact ones returned upon withdrawal, so these types of gold deposits are not considered fungible.

## 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 create a flow in trade and exchange processes because they're essentially equal in value. A drop in value in one area can be balanced by a rise in another fungible asset.

## What Is a Fungible Issue?

A fungible issue is a bond that replicates one that's been previously offered by the same company. Its terms are the same but the yield will most likely be different.

## What Are Non-Fungible Tokens?

[Non-fungible tokens](https://www.investopedia.com/non-fungible-tokens-nft-5115211) (NFTs) are assets that are not interchangeable. They're often digital and can include assets such as music, images, and videos, as well as some forms of cryptocurrency. You can have a right to ownership if you purchase an NFT but this right doesn't necessarily translate to outright ownership of the asset.

## The Bottom Line

Fungibility is a critical concept in finance, signifying goods or assets that can be interchanged without losing value or utility. It simplifies trade, typical in commodities, currencies, and certain stock shares listed on multiple exchanges. Conversely, non-fungible assets like real estate and unique collectibles lack this interchangeability due to their distinct characteristics. Understanding the differences helps investors make informed decisions based on the nature and liquidity of their assets.

> **Article Sources**
>
> 1.  Federal Reserve Bank of New York. "[Gold Vault](https://www.newyorkfed.org/aboutthefed/goldvault.html)," Select "Storing the Gold."
>     
> 2.  Congressional Research Service. "[Non-Fungible Tokens (NFTs)](https://crsreports.congress.gov/product/pdf/R/R47189)," Page 1.