Fungibility is the right to exchange a product or asset with other individual products or purchases of a similar kind. Fungibility is a characteristic of a commodity whose individual units are indistinguishable from the rest of the units, and such commodities are called fungible goods or tokens. For example, a ₹2000 currency note can be exchanged for four ₹500 notes. All the fungible tokens of a particular commodity have the same value. Some examples of fungible tokens include shares, currency notes, precious metals, etc.
In order to be regarded as a fungible token, an asset must have an established value and be interchangeable with other things of like value. Bitcoin(BTC) is regarded as a fungible good because it may be purchased and traded for the same amount in different currencies. Fungible assets can be divided into smaller pieces and sold separately, making it simpler to trade them for similar goods. The commodities which cannot be interchanged because of different specifications are known as non-fungible assets, for example, bikes and cars.
The same commodity can exist in both fungible and non-fungible forms. For example, Gold is considered fungible because it can be easily exchanged as coins and ingots, and it is indistinguishable. Whereas, A unique item such as a gold statue or jewelry is considered non-fungible because equal amounts of both are not always interchangeable. Fungible assets simplify the process of trade as fungible goods have equal value.
What is the meaning of Fungibility?
Fungibility is the characteristics of goods that allow them to be exchanged with other goods of a similar kind; such goods are known as fungible goods or tokens. Fungibility refers to the interchangeability and identicalness of each unit of an entity with other units of the same entity. For example, specific grades of goods, such as 24k Gold, are fungible because it does not matter from where the Gold is extracted. Some examples of fungible goods include Commodities, company shares, and currency bills.
Fungibility allows simplifying the process of trade because all the items involved in the trade have equal value for equal quantity. The concept of Fungibility is sometimes confused with the potential to trade a particular item for any other goods, but Fungibility allows the exchange of similar and equivalent commodities. The fungible goods are often confused with barter or liquidity. The main difference between fungible goods and barter is that the goods traded under the barter may not be equivalent, whereas fungible goods are equivalent. An asset is said to be liquid when it can be exchanged for money, but a fungible asset is not always liquid.
For instance, suppose someone has twelve cups in his house, and he can use any of them largely interchangeably, so these cups can be considered fungible. The most common examples of Fungibility in finance are items like money and commodities. For instance, crude oil can be used almost interchangeably. One can exchange a barrel of light crude oil for another barrel of oil with no consequence. It does not matter where the oil was produced. Individual shares in the same corporation are similarly fungible because they grant the bearer the same level of ownership.
What does Fungible Good mean?
Fungible goods refer to assets or securities that have the equivalent value for the same quantity; also, such goods are easily interchangeable. Major examples of fungible goods include Commodities, common shares, options and currency.
Goods may no longer remain fungible when fungible assets are given specific numbers. Assigning numbers to the goods makes them distinguishable, but in actuality, the fungible goods should be indistinguishable. For example, Gold is technically fungible because a certain gram of Gold is equivalent to another gold of the same weight. Gold bars may be assigned distinctive serial numbers and acquired by specific investors while being held by a custodian. Gold is said to be allocated under this system. Holders of allocated Gold typically have superior legal defenses in the case of insolvency. They possess specific gold bars, which are not regarded as fungible items. Stocks that are cross-listed are also fungible goods. It makes no difference whether the investor bought the shares in International Business Machines (IBM: NYSE) on the New York Stock Exchange (NYSE) in the United States or on the London Stock Exchange in the United Kingdom (LSE).
What are examples of Fungible Goods or Assets?
Examples of fungible goods or assets include all such goods which are indistinguishable and have equal value for each unit. Major examples of fungible goods include currency, precious metals and oil barrels etc. The value of all the fungible assets remains the same for the same quantity of goods. Fungible goods do not lose any value over the exchange because of indistinguishability and uniformity in price. The majority of asset categories traded in online brokerage accounts are interchangeable and indistinguishable. Fungible assets also include stocks, bonds, and options contracts.
These investments can be exchanged for the investments of other investors; for instance, a share of Company X’s stock in one investor’s portfolio is equivalent to or identical to a share in another investor’s portfolio. The same concept applies to option contracts. The value of a contract for the same security will be the same as another contract of the same type with the same strike price and expiration date.
Following are the examples of majorly traded fungible assets:
1. Cryptocurrencies
Cryptocurrency is a digital asset that can act as a mode of payment. Cryptocurrencies work on different algorithms that execute the transactions on all the systems that are part of the network. It is a peer-to-peer network that enables anyone using the network to send and receive payments. There are three major cryptocurrencies in the market in terms of market value: Bitcoin, Litecoin, and Ethereum. The transactions occurring on the cryptocurrency network are recorded in the ledgers, and the cryptocurrencies are themselves stored in digital wallets. A distributed public ledger known as the blockchain, which is updated and maintained by currency holders, acts as the foundation of cryptocurrencies. These digital currencies are created by the process of mining. Under this process, complex mathematical equations are solved by computers, which results in the formation of new currency. Bitcoin was developed in 2009, but still, the financial applications of cryptocurrencies and blockchain technology are constantly developing, and more are anticipated in the future.
2. Gold
Gold bullion, or chunks of Gold with an official purity rating of at least 99.5%, is frequently fungible. A standard gold “round,” which is comparable to a coin but is not produced by a government, ought to be worth almost the same anywhere in the world.
Suppose two coins have the same amount of Gold in them, but the actual gold coins may differ since they may have different values. A one-ounce gold coin from a 1ahistoric shipwreck that occurred in the 16th century, for example, may be far more valuable than a new one-ounce Gold American Eagle coin that was just produced this year.
3. Stocks
One share of a stock will typically be the same as any other share, just as it is with other financial assets like bonds or options contracts. Stocks do occasionally come in different variations. There is no difference between the Company A shares in your portfolio and the Company A shares in someone else’s portfolio.
They have different values and characteristics, shares of a Class A stock and a Class B stock in the same corporation will not be fungible.
4. Commodities
A commodity is a basic good that is used in trade and can be exchanged for other items of the same kind. The majority of the time, commodities are utilised as raw materials to create other products or services, therefore a commodity is typically a raw resource utilised to create completed goods. The commodity can be exchanged easily for similar goods or assets, because of which it is also considered as a fungible asset.
5. Dollar Bills (Money)
Dollar Bills (Money) are the most basic form of fungible asset, which is commonly used by people all around the world. Money acts as a medium of exchange for goods and services belonging to different categories by acting as a mode of payment. Dollar bills are indistinguishable and interchangeable. For example, a $10 bill can be exchanged for ten $1 bills, which shows that the value of the asset does not change during the process of trading. Also, Any other U.S. dollar or its composite pieces can be exchanged for one U.S. dollar (pennies, nickels, dimes, etc.). All the currency notes are identical to each other, and hence they can be easily interchanged.
6. Financial Assets
A financial asset is a liquid asset with value derived from a legal claim to ownership or a contractual right. Financial assets include cash, investments in stocks, bonds, mutual funds, and bank deposits. Financial assets do not always have an intrinsic physical value or even a physical form, unlike real estate, commodities, or other tangible physical assets. The market conditions in which they trade and the level of risk they involve are what determine their worth. Financial assets like cash and stocks are are most common examples of fungible assets.
7. Financial Securities
Financial security is a fungible, negotiable financial instrument with some kind of monetary value. Security can represent rights to ownership as represented by an option, a creditor relationship with a government agency or company as represented by owning that entity’s bond, or ownership in a firm as represented by the stock.
8. Fiat Currencies (Money)
Fiat money is also a fungible asset, which is money that is produced and issued by governments. As previously stated, a banker or cashier will not see any difference between a one-dollar bill and any other dollar bill because they are both worth equally. However, the currencies must be of the same kind; for instance, one rupee cannot be exchanged for one dollar.
Common shares are given to owners of businesses and other investors as evidence of the capital they have invested in a company. A company’s common stock serves as a residual claim to its current and future profits. As a result, shareholders are considered as a company’s partial owners. Common shares are also interchangeable because of which they are also regarded as fungible assets.
What makes a good or asset Fungible?
The goods or assets are considered fungible when they follow the basic principle of indifferentiability and interchangeability. The fungible goods can be exchanged for one another without losing value because they are practically equivalent in terms of their characteristics. These goods do not have any unique characteristics because of which the value for all the goods of similar quantity remains the same.
The biggest advantage of fungible goods is that they can be traded easily, and acute investors can benefit from the price difference. This difference is created by different prices of goods on multiple trading platforms; this is known as arbitrage. For example, suppose a particular stock of a company ‘A’ is listed on both the Netherlands and German stock exchanges. The stock is priced at 20 Euros in the Netherlands stock exchange, whereas the same stock is priced at 22 Euros in Germany. The investor can generate a profit of 2 Euros/share by buying the shares from the Netherlands and selling them on the German Stock Exchange.
Do you need to register your goods or assets to consider them Fungible?
Yes, fungible assets like precious metals and shares are registered by respective organizations, but not all fungible assets are required to be registered. For example, company shares are registered on various trading platforms like BSE, NYSE etc., but other fungible assets like food grains are generally not registered on any platform. There is no general law for registering all fungible assets. Only some of the assets, which are either expensive or precious, needed to be registered under their respective organizations.
What makes the Goods or Assets Non-Fungible?
Non-Fungible goods or assets are unique and non-interchangeable because each unit has characteristic qualities, due to which the value does not remain uniform. For example, real estate is a non-fungible asset as the value of the property depends upon various factors like surroundings, nearby facilities, etc., due to which two similar properties may have different values, and hence they will become non-interchangeable. The same concept applies to diamonds, whose value depends upon various factors like color, cut, size, and grade.
Non-Fungible goods do not have the same value, and hence they cannot be copied or exchanged with other goods of the same kind. A non-fungible asset may need a little more time and consideration while being sold than a fungible asset, which can be sold in a variety of ways and exchanges. The investor can complete the fungible goods trade just by exchanging the product, whereas one has to first sell the first product and buy another product just to complete the trade in the case of non-fungible goods. Some examples of non-fungible goods include Art, NFTs, Diamonds, etc.
What are examples of Non-Fungible Goods or Assets?
Real estate, art, diamond etc. are examples of Non-Fungible Goods. Below listed are some more.
1. Real Estate (Land)
Property must be assessed in light of a number of various aspects, including how much comparable homes have sold for, the level of housing demand in the neighborhood, and the home’s distinctive features during the time of selling of real estate. Real estate is regarded as non-fungible because its worth is reliant on various evaluation factors, such as square footage, architecture, and interior amenities.
2. Art
Artworks are unique creations, which makes them non-fungible. For instance, there is just one Mona Lisa painting, and even when there are a huge number of copies available, still the main painting is expensive as compared to the copies.
Art can be reproduced to some extent, but whether it’s a painting or a sculpture, there will always be one original work from which reproductions take their cue. Many works of art are expensive because they are rare.
3. Diamond
A diamond is non-fungible because of its singularity in terms of size, shape, colour, quality, and grade. A unit of one diamond cannot be exchanged for an equivalent quantity of another diamond.
4. Collectibles
Collectibles are unique, and because of this, each collectible has a different value. This value is dependent on various factors like ownership, related events etc. All unique and non-interchangeable goods are considered non-fungible, and hence collectibles are also non-fungible.
5. Non-Fungible Tokens
NFTs, or non-fungible tokens, are essentially strings of data that represent ownership of a particular type of digital asset and are maintained on a blockchain.
Non-Fungible tokens are not the only form of digital non-fungible assets. Non-fungible tokens include family heirlooms, digital collectibles, and art collections. These unique items cannot be directly exchanged for other items of equal value. Non-fungible tokens (NFTs) are unique, and their worth depends on their rarity and the community that supports them.
Can you trade Fungible Goods or Assets in the Stock Market?
Yes, Fungible investments can be exchanged for the investments of other investors in the stock market; for instance, a share of Company X’s stock in one investor’s portfolio is equivalent to or identical to a share in another investor’s portfolio. The same concept applies to option contracts in the stock market. The value of a contract for the same security will be the same as another contract of the same type with the same strike price and expiration date.
Is oil Fungible good?
Yes, oil is a fungible good. There are various qualities and grades of oils available in the market; still, it is easily interchangeable among various grades. To make the desired mixture, consumers generally combine different grades of crude oil at will. Benchmark prices have also produced a highly integrated price structure on the global market, further enhancing the interchangeability of oil. The Fungibility of oil has very high global importance, as it deeply affects the global energy market. This helps in the reduction of monopolies by big producers of oil like OPEC and Russia.
For example, Global producers have historically compensated for supply disruptions caused by the Gulf War and the Venezuelan oil strike in 2002 by doing just that, serving as excellent examples of Fungibility in action.
Are cars Non-Fungible?
No, cars are not fungible, concerning ownership of the car. All the cars do not have the same monetary value. For example, a car owned by a famous sportsperson will be expensive as compared to a car owned by a normal person. Both of these cars cannot be interchanged because of the price difference, even when both of these cars are of the same model and the same manufacturing year. Similarly, a car part of a famous movie will be auctioned at a much higher price as compared to other cars of the same model.
Are companies Fungible?
Yes, the company shares are fungible, which means the parts of the company are fungible. Cross-listed shares of a company are fungible. A stock that trades on numerous markets is said to be cross-listed. Businesses that cross-list their shares generally sell them on one or more overseas exchanges in addition to one or more home stock exchanges. The shares of a U.S. corporation, for instance, may be fungible when it is listed on the New York Stock Exchange and the London Stock Exchange in the U.K. Companies cross-list their securities in the hopes that a bigger investor base will boost stock prices and liquidity.
Are Options and Bonds Fungible?
Yes, Options and Bonds Fungible are fungible because the value of a contract for the same security will be the same as another contract of the same type with the same strike price and expiration date.
What is the main difference between Fungible and Non-Fungible?
The primary distinction between fungible and non-fungible assets is how they are traded and exchanged. A non-fungible asset may need a little more time and consideration while being sold than a fungible asset, which can be sold in a variety of ways and exchanges.
For example, when someone is trying to sell a diamond ring. In the case of a fungible good, the person will be able to sell the metal and diamond separately or both together for the same price to many merchants without any loss in value.
But in actuality, the diamond ring is an example of a non-fungible asset. Several factors, including the diamond’s purity, its cut, and the type of metal used to make the ring, determine the diamond ring’s final value. The final value of the product may change during a trade because of all these factors.
What is the difference between Fungible and Liquid Assets?
Fungibility is the ability to copy or exchange an asset, while liquidity is the ease with which it can be traded or exchanged. These two concepts are distinct from one another. Conversely, some non-fungible assets are liquid assets while others are not. Some fungible assets are liquid, while others are not.
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