I have been hearing, in a lot of instances, about bitcoin or other cryptos being fungible but never really understood the term and the significance it have. Why is it important that a crypto is fungible?
For your information, Bitcoin is not completely fungible. Fungibility is actually one of the basic requirement of money as shown in the infographics above. Fungibility refers to the capability of mutual substitution between the individual units of a commodity or assets. Gold, for instance, is fungible because one kg of gold carries the exact same value of any other kg of gold. Therefore, currencies, bonds, shares or other commodities like oil and precious metal are all fungible in nature.
Why is Bitcoin not fungible? Because it can be traced. All the transactions of Bitcoin can be looked up by the public. Assuming that a Bitcoin was used for illegal activities, and for some reasons it ended up in your wallet. It would be entirely possible for someone else to trace the origin of the Bitcoin in your wallet and for someone else/ some companies to blacklist your Bitcoin/Address. This won’t happen with a dollar bill, for example, no one cares if a dollar bill is good or bad or what was it used for previously, a dollar previously used for drug purchase carries the exact value as a brand new dollar. The ability to easily trace the history of any bitcoin transaction undermines the fungibility of the digital currency.
A company could refuse to accept your bitcoin or you might have trouble selling your bitcoin because of its tainted history. You might be forced to sell it for less in exchange for a “fresh/clean” bitcoin which in other words, 1 bitcoin is not equivalent to 1 bitcoin ( X fungible ). Fungible cryptos are typically cryptocurrency that is highly anonymous and private in terms of transactions like monero. There are no ways to trace or extract information regarding a particular transaction, making it a fungible currency in the sense that no one Monero would ever be valued less than any other Monero. Hope that it helps.