Fungibility is a key term in finances and cryptocurrencies, but what does it mean? Join us as we explore fungibility in this simple, reader-friendly guide.
Fungibility is a term applied to assets when their units are interchangeable with each other, and become indistinguishable.
An asset class can be described as fungible when each of its units shares an equal market value and validity. So, a pound of pure gold would be the same as another no matter what form it took.
Fiat currencies, commodities, and cryptocurrencies can all be fungible assets.
But an equal exchange of a fungible asset doesn't always refer to trading two units that are identical. Provided that the transaction occurs between two items of the same type, sharing the same functionality, it can be referred to as an equal exchange.
Let's say you exchange a ten-dollar bill for ten one-dollar bills - they're different types, but they share the same validity. The US dollar would be the fungible asset in this case. The bills just represent their underlying value.
The majority of cryptos are fungible assets. Bitcoin can be described as fungible as each BTC unit is the same as any other, so they're of an identical functionality and quality. This means it's irrelevant which block the coins were mined in, as all BTC form part of one blockchain and share the same functionality.
But if a blockchain is formed and a new Bitcoin is made, those wouldn't be regarded as original because they would belong to a different network.
The traceability of Bitcoin and other cryptos can make certain coins less appealing than others, particularly if they have been utilized in questionable transactions. A merchant or service provider could refuse to take Bitcoins as a form of payment if they believe they were handled by criminals previously.
But this doesn't affect Bitcoin's fungibility: that's totally different to traceability. Regardless of a BTC's history, all Bitcoins are of the same design and function. After all, USD remains a fungible asset despite being used by criminals countless times before.