Fungibility is an important property of money. It simply states that two people should be able to exchange equal value (eg: 1 XMR for 1 XMR) without either party losing out. Suppose that someone offered to trade money obtained from the WannaCry ransomware attack for the same amount of your own. Would you accept it?
Bitcoin and every other non-private cryptocurrency lack this important quality, since people can track what the money was used for in the past. This places the receiver in an unfortunate situation where they need to audit all incoming funds or else risk receiving funds they cannot use. Perhaps even more importantly, they want to avoid having any association with any of the illicit actions of these “tainted coins”.
Fungibility is even an issue for coins with optional privacy, since people can determine which funds are private and which are not. Take a traditional mixer for example. Coins that have a history of being processed through a Bitcoin mixer may sell at a discount since they are more likely to have been used for nefarious practices than new coinbase rewards, which may sell for a premium.
Beyond fungibility, privacy is important for many other practical reasons, even if you do not care that people can see what you buy. Privacy protects your wallet balance when making a transaction, your income when negotiating rent, and your payments if you have a medical condition.
