A fungible asset is one that can be exchanged with another of the same type without any difference existing between the two. For example, units of the same currency are fungible.
One U.S. dollar can be exchanged for another dollar, and they could both be used to buy something in the same way. One U.S. dollar cannot be exchanged for one Mexican Peso, however. Units of different currencies are not fungible.
What is Fungibility?
How do we define “fungible”?
The simplest way might be to describe fungibility as “the ability to be interchangeable.” That means that fungible assets, such as the U.S. dollar, have equal value to other fungible assets of the same kind.
Most of the types of assets traded in online brokerage accounts are fungible. Stocks, bonds, and options are considered fungible assets. These assets mix freely with the assets of other investors. One investor’s Tesla (TSLA) shares, for example, are indistinguishable from those of another investor. The same holds true for options contracts. A contract for the same security with an identical strike price and expiry date will have the same value as any other contract of its kind.
Looking at assets that are not fungible can also help to shed light on the fungible definition.
Lots of land are not fungible because no two are exactly alike. You can’t exchange an acre of farmland in California for an acre of desert in Nevada. Basketball cards aren’t fungible because they are all different and have unequal values depending on a variety of factors.
Examples of Fungible Goods
As mentioned, currency units (money) are a good example of a fungible asset. Any $100 bill can be used to buy $100 worth of goods and services or exchanged for another $100 bill that has the same exact value and utility.
Cross-listed common stocks are considered fungible because shares represent a stake of ownership in the same company whether they are bought and sold on stock exchanges in America, Japan, or London. But a Class A stock and a Class B stock in the same company would not be fungible, since they have different values and attributes.
Many commodities and precious metals are also fungible. A pound of wheat, soy, or corn would be exchangeable for another pound of the same goods in most cases, assuming both were in good condition.
A barrel of oil generally has the same value as any other barrel of oil and can fetch the same price. An ounce of gold is generally worth the same as any other ounce of gold, with some exceptions.
Gold is an interesting example because it demonstrates how thin the line between being fungible and non fungible can be.
Gold bullion, or officially recognized pieces of gold having at least 99.5% purity, are typically fungible. A standard gold “round,” which is like a coin that’s not minted by a government, should have the same value anywhere in the world and be worth almost exactly the same as any other round.
Actual hold coins can be different, however. One gold coin may not always have the same value as another gold coin, even if they both hold the same amount of gold. A rare one-ounce gold coin from a historic shipwreck that took place in the 16th century might be worth much more than a new one-ounce Gold American Eagle coin created this year by the U.S. mint, for example.
Sometimes even gold bars that have all the same physical properties might not be fungible. The Federal Reserve Bank of New York, for example, holds gold bars for various governments around the world. Upon deposit, the bars are carefully inspected and weighed to meet certain specifications.
The process is recorded and countries deposit their gold with the expectation that they will be able to later withdraw the exact same bars – not the gold bars of a different country.
In this case, gold bars stored at the Federal Reserve’s vault are not fungible. Each bar belongs to a specific owner and cannot be exchanged for other bars, even though they may look identical.
Recommended: Investing in Gold and Other Previous Metals
The cryptocurrency market offers another example that helps understand fungibility. Bitcoin, the world’s largest cryptocurrency by market cap, is not necessarily fungible even though one bitcoin or altcoin is mostly indistinguishable from another.
That’s because all Bitcoin transactions occur publicly, and coins that have been used in criminal activity in the past could possibly be identified and deemed undesirable. Because all transactions are permanently recorded on the public blockchain, it would be easy to identify those coins.
If transactions were private rather than public, then, in theory, all Bitcoins would be fungible because there would be no way to distinguish them from each other. When you pay for something with cash, the transaction is fungible because the merchant accepting your dollars or other national currency can’t tell the difference between the currency units you present and any other units of the same currency.
While some cryptocurrencies are fungible assets, other digital assets, such as non-fungible tokens (NFTs) are not. Through the examples of gold and cryptocurrency, we can see how easily the line between fungible and non-fungible can become blurred. Sometimes it can be difficult to define “fungible.”
Recommended: How to Invest in Bitcoin 101
Arbitrage: A Benefit of Fungible Investments
One benefit of fungible investments is that astute investors can profit from something called arbitrage.
Arbitrage refers to the potential to profit from differences in price across multiple trading platforms. For example, imagine a stock listed on both the Netherlands and German stock exchanges. Both countries use the Euro. If the stock were trading for 5 Euros in the Netherlands and 5.25 Euros in Germany, traders could buy shares from the Netherlands exchange and sell them on the German exchange.
Then, they could keep the profit, which in this case would be 0.25 Euros per share.
Fungible stocks priced in different currencies can also have arbitrage opportunities. Because of fluctuating exchange rates, calculating the different prices would have an added layer of complexity. But the profit margins can be even potentially, since there may be gains in both the arbitrage and the currency conversion, if both were favorable.
Investors can also sometimes purchase futures contracts for fungible assets, based on your expectation of how its price will change in the future.
To define fungible, an investor must first understand what makes an investment unique. Or rather what makes it not unique. Anything that has a special quality making it unexchangeable for something else just like it will does not meet the definition of fungible. Fungible assets are only those that you can exchange for others like them without anyone being able to tell the difference.
Most of the time you can clearly determine whether an asset is fungible or non-fungible. Other times, it’s harder to differentiate between the two. Bitcoin and gold are two good examples of assets that can be fungible or non-fungible, depending on the circumstances.
Fungible assets can present arbitrage opportunities for astute traders. This is more of an advanced strategy, requiring awareness of multiple markets, and typically needs to take place at scale in order to generate a significant profit.
If you’re ready to start trading fungible and non-fungible assets, you can get started with the SoFi Invest brokerage platform, which allows new and experienced traders alike to participate in the markets as they please with no commission. Get started today with as little as $5.
Photo credit: iStock/ferrantraite
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