What is Fungibility?

Fungibility is like water in a lake…

You can dip a cup in the lake and fill it with water. If you pour the water back into the lake, then fill your cup again, you still have a cup full of water. You probably won’t have the same molecules of water in your container each time, but the water you refill the cup with is mostly identical to the water you had initially, and you can use it for the same purposes.

Fungibility is a property that makes something interchangeable. If an item is fungible, you can exchange it for a different unit of that same item with little noticeable difference. Where it came from or who made it doesn’t make a real difference for the item’s quality or utility.

One of the best examples of fungibility is money. Any dollar bill you have is worth the same amount. You can take a dollar bill and trade it with someone else for a different bill, and nothing has really changed. If you have a dollar bill and exchange it for four quarters, it still doesn’t make any real difference, because you still have the same amount of money. Other currencies — as well as many cryptocurrencies — are fungible, as well.

Fungibility is common in commodities and other goods in which individual units of the product are relatively uniform. A bushel of corn is like any other bushel of corn (of the same grade), and an ounce of gold is like any other ounce of gold.

However, a good isn’t considered fungible if the quality of the product can have a noticeable impact on its value or utility. Two shirts may look similar, but one made of high-quality cloth by a skilled seamstress is worth more than one made with low-quality cotton using a poorly made sewing machine. Though both shirts serve the same purpose, they aren’t interchangeable, and therefore not fungible.

One example of fungibility is shares of common stock in a company. If you purchase one share in Coca-Cola, that entitles you to a portion of ownership in the company. You receive the same rights and dividends as everyone else that owns one common share in the company. Which share you own doesn’t affect your voting rights or the dividends that you receive. You could trade your stock for any other share and receive the same benefits, so the shares are fungible.

Some simple consumer products can be fungible, as well. For example, a box of oatmeal is mostly interchangeable with other boxes of oatmeal, assuming they contain the same quantity and quality of food. However, the oatmeal can lose its fungibility if, for example, a consumer opens the box. That causes the box of oatmeal to lose value, making it non-fungible compared to an unopened box.

The difference between fungibility and non-fungibility is whether you can swap two units of a good without significant effect.

For example, if you swap a one-ounce gold coin for another gold coin of the same weight and purity, you haven’t gained or lost any value.

Companies that produce fungible goods generally can’t compete on quality, because all units of the product are considered interchangeable. There isn’t a noticeable difference in quality. Instead, they have to compete on price and availability. The company with the cheaper or easier to purchase products would have the advantage, in theory.

Non-fungible goods are any products that can have a noticeable difference in quality or are not interchangeable for some other reason. For example, you can’t take any two watches and expect them to have the same quality and value. The raw materials and craftsmanship that go into making them have a significant impact on the quality of the finished product.

Businesses that make non-fungible products can typically compete on more than just price and availability. For example, they could aim to offer higher-quality products, even if they charge a higher rate.

An example of a non-fungible good is a car. Two cars from different manufacturers accomplish the same task: getting you from point A to point B. However, there are noticeable differences between the two vehicles. Even cars of the same model aren’t fungible because there are so many things about each vehicle that can make them unique.

Similarly, if you lend your guitar to a friend and they return a different one, you probably wouldn’t be very happy — even if the guitars were the same make and model. That’s because each instrument has a different maintenance history. You might also have an emotional attachment to the instrument, making them non-interchangeable.

Another example of a non-fungible good is a trading card. Even two copies of the same card can’t be equally exchanged because of factors that affect their value. The condition of each card, the centering of the print, and whether the printed art remains sharp or looks muddy affect the value of each card.

Real estate is another asset that is rarely fungible. Even two identical homes built on two identically sized and shaped parcels of land are non-fungible, because the difference in location has a significant impact on their value. Even if the homes sit next to each other on the same street, one might receive more sunlight or have less noise from traffic.

The fungibility of money refers to the fact that all money is the same. It doesn’t matter whether you have one $100 bill or one hundred $1 bills. You can use them to purchase the same product. In the same way, the source of your money (except for dirty money from illegal activities) doesn’t impact how you can use it.

If you take out a loan, the bank probably doesn’t care whether you pay it back by check, cash, or a wire transfer. Similarly, the bank doesn’t expect you to return the exact bills it gave you when you took out the loan.

In the world of stock trading, fungibility refers to the ability to convert shares bought on one market to equivalent shares that you can sell on a different market.

Most countries have their own stock exchanges, and businesses can list their shares on the exchanges of their choice. However, in the modern global economy, many people want to invest in companies across the globe.

Sometimes, businesses list shares on multiple exchanges. For example, a foreign company may list American depositary shares (ADS) on U.S. stock exchanges. An ADS isn’t a share in a business. Instead, it gives the owner the right to shares held in an overseas bank.

If a security is fully fungible, a holder can convert it from one exchange to another. For example, let’s say an ADS in company XYZ is worth two common shares of XYZ on a foreign market. The holder of two shares of XYZ could exchange them for one ADS to trade in the U.S. Each ADS can have a different ratio for conversion. You might need two ADSs to get one share on a foreign market, or you might get 100 shares for every ADS you hold, depending on how the ADS was created.

A cross-listed stock is a stock that trades on multiple exchanges. Typically, businesses that cross-list their shares sell their shares on a domestic stock exchange and one or more foreign exchanges. For example, a U.S. company could list its shares on the New York Stock Exchange and the London Stock Exchange in the U.K., and those shares would be fungible. Companies cross-list their shares hoping that the larger pool of investors can increase share prices and liquidity.

In general, people aren’t considered fungible. Everyone has very different experiences, ways of doing things, and skills. Two people can’t be exactly the same, even in similar jobs. However, some companies have suggested that certain job roles can exhibit aspects of fungibility. For example, real estate agents can all access the same inventory of properties and sell them to consumers. Insurance agents can sell the same policies to people. In a factory that relies on low-skill labor, workers can typically perform similar tasks, so some may argue that people are fungible.

Still, everyone has different experiences and skills, so in the majority of contexts, you can’t switch around people without noticeable effect. Even in the context of business, there are many arguments against the fungibility of people because of their different skill sets.