- Fungibility refers to the ability of an asset to be exchanged for something else of equal value.
- Some examples of fungible assets include currencies, commodities, and gemstones.
- Non-fungible assets are unique, requiring much more complex valuation before a sale, and include things like real estate, art, and sports cards.
Much has been made of the Non-Fungible Token (NFT) movement. As an alternative to traditional artwork, creators create digital art and “sign” it using the Ethereum blockchain, ensuring each token is one of a kind. These digital artworks are so popular that even the National Basketball Association and Major League Baseball have gotten into the game.
But what does “fungible” mean?
What does fungible mean?
Fungible refers to items or commodities that can be exchanged for other assets or commodities of the same type. For example, currency is a fungible asset because it can be exchanged for other currencies, goods, or paid for services.
“Something that is fungible means that it is identical to another item and can be traded or exchanged for that item without any of the participants in the exchange losing value,” explains Ian Kane, co-founder of the FinTech platform based on the Unbanked blockchain. “If I give you a dollar and you give me a different dollar, we both still have $1 of purchasing power.”
On the other hand, something that is not fungible cannot necessarily be easily exchanged for something of equal value. Art and collectibles are often considered non-fungible due to their unique properties. Because there is only one original, it has a distinctive property that cannot be easily assessed or exchanged for something similar.
To be considered fungible, an asset must have an agreed value and be interchangeable with other items of similar value. Bitcoin is considered fungible because it has measurable value in all currencies and can be bought and sold for equal value. Additionally, fungible assets can be broken down and sold into fractions, making it easier to exchange for other similar items.
“If you print 100 copies of the same photo, they become fungible; if we trade it, we’ll get the same thing back (like a dollar bill),” says Gutter Dan, co-founder of the NFT series. Gutter Cat. Gang. “Similarly, those 100 photos are not unique and could be duplicated or destroyed. With NFTs, the reverse is true: they cannot be duplicated or destroyed. [because of the underlying] blockchain technology, and [because] each one is purely unique.”
Examples of fungible assets
We trade fungible assets daily without thinking twice. When you buy groceries, buy gas for your car, or run a coffee shop, you are exchanging money for goods and services – or exchanging fungible items.
Here are some examples of fungible assets:
- Currency: Around the world and in the digital space, currencies can be exchanged against each other at an agreed market rate. US dollars can be exchanged for euros, Japanese yen or bitcoins in whole and fractional numbers.
- Shares and mutual fund: When investing in stocks and mutual funds, investors spend money to obtain a financial instrument of the same value at the time of purchase. If a single share of a stock can cost $5.70, the buyer knows how much to spend to earn multiple shares, knowing that it can be exchanged for cash in the future.
- Precious metals: Gold and silver are traded daily at market rates, assuring owners of the value they hold at the time of purchase. When it’s time to sell, someone who holds a precious metal can easily exchange it for cash based on the market rate, making it fungible.
Examples of non-fungible assets
As mentioned earlier, while fungible assets are interchangeable with each other, non-fungible assets are unique. Therefore, they must be judged on several criteria. Some of the factors buyers and sellers consider include provenance (or who owned the item before), its uniqueness from others, and how the market for non-fungible assets has changed over time. Additionally, non-fungible assets cannot be dismantled and sold into pieces: Value is determined by the whole item. Some non-fungible assets include:
- Immovable: Selling real estate requires a property to be appraised based on several different factors, such as the selling price of comparative homes, the demand for properties in the area, and the uniqueness of the home. Because value is based on these valuation points — like square footage, architecture, and interior features — real estate is considered non-fungible.
- Trading Cards: Although trading cards are offered in equally priced packs, the actual contents may have different values depending on their condition, rarity, and composition. Modifiers like scoring and autographs can increase the value. Therefore, the unique condition of trading cards makes them non-fungible.
- Non-fungible tokens: Non-fungible assets are not limited to digital tokens. Any one-of-a-kind item that cannot be directly exchanged for something of equal value may be considered non-fungible, whether heirlooms, digital collectibles, or collections of art. Non-fungible tokens have a value based on the rarity of the item and the community that drives it, and no two NFTs are the same.
Fungible vs Liquid
Although some assets are fungible, they may not be liquid, which is different. Fungibility refers to the ability to exchange an asset for a similar item of the same value, while liquidity refers to the ease with which an asset or security can be bought or sold in the secondary market.
“A liquid asset is something that sells easily whereas a fungible asset is interchangeable but not necessarily easily sold,” says Shaun Heng, vice president of growth operations and chief of staff at the cryptocurrency tracking website CoinMarketCap. “An example of a fungible but illiquid asset would be shares of the same class in a company that is not publicly traded. A common stock or preferred stock is fungible for a stock of its same class. However, it can difficult to find a buyer for the shares of a private company.”
Although all liquid assets are fungible, not all fungible assets are liquid. If you cannot sell a fungible asset for a value in short form, it is not liquefiable.
The bottom line
Simply put, fungible assets are interchangeable because their value defines them. Think of currency, mutual funds, and even gasoline as fungible assets. By knowing how fungible assets work – and how they can play into your ultimate portfolio strategy – every investor can make smart decisions about how and where to invest in a combination of the two.
While there’s a lot of excitement around digital artworks and non-fungible tokens, experts recommend investors take their time to carefully assess whether jumping into space is right for their strategy. Before entering an asset, it is important to research item scarcity, understand trends, and understand potential risks and rewards.
“Whatever you decide to do, make sure you can take the risk,” says Les Borsai, co-founder and chief strategy officer of registered investment advisory firm Wave Financial. “Don’t spend what you can’t afford to lose. Make sure you buy what you’ve been researching. Just because the returns are aggressive and fast doesn’t mean it’s essential to understand what you’re into. invest before you do.”