Ripple has made waves over the last several months. It was the best-performing cryptocurrency of 2017. It boasts a steady stream of new corporate customers testing its blockchain technology. Many see it as a better version of bitcoin -- and when it comes to transaction speed, they're absolutely right. There's just one problem with the bullish outlook for the cryptocurrency.

Ripple the company, its blockchain software products, and Ripple the cryptocurrency (XRP) are all separate entities. Investors may be unaware that the success of the company or its blockchain is not in any way connected to the success of the tokens. In other words, investors who buy XRP thinking that they're investing in the potential of the Ripple blockchain are making some assumptions that could result in a disastrous outcome.

A physical coin with the Ripple logo on it.

Image source: Getty Images.

Chinks in the armor

When discussing Ripple, it's important to make the distinction between the company and the tokens. They're not the same thing, as Hacker Noon succinctly summarized.

Ripple the company is a start-up that develops blockchain software products for banking and financial customers. It currently has two software products on the market and one in development:

  1. xCurrent allows bank customers to conduct faster and cheaper financial transactions across national borders.
  2. xRapid allows bank customers to improve liquidity when conducting transactions in emerging markets by using Ripple tokens as a "bridge" currency to help settle funds more quickly.
  3. xVia is a new software product launching in early 2018. It's similar to xCurrent but will allow non-bank customers to conduct financial transactions as well.

Ripple the cryptocurrency is represented by XRP tokens. While the cryptocurrency was created by the start-up of the same name, the tokens aren't actually required to use the company's blockchain software. In fact, only xRapid uses XRP tokens. The two other products, xCurrent and xVia, don't use XRP tokens at all.

That's a pretty significant detail. Why? Well, when Ripple announces that it's signing up customers left and right to test its blockchain products, it's usually referring to xCurrent and xVia, which means absolutely nothing for XRP tokens. In fact, most bank customers are leery of using xRapid due to the extreme volatility of XRP tokens. What's good for crypto traders isn't good for business.

However, the reverse isn't true. If Ripple the cryptocurrency became worthless tomorrow, Ripple the company and its software products would be just fine (after it got over the enormous loss of value of its XRP holdings), but crypto traders and investors would not share in their success. Ripple's core software products are completely independent of XRP tokens, and even xRapid could be configured to use other currencies.

Banks that use xCurrent and corporations that will come to use xVia may eventually end up using xRapid, and therefore XRP tokens, but that's not guaranteed. They could use fiat currencies or some other cryptocurrency (perhaps one that supports smart contracts, unlike XRP), or some other blockchain altogether.

Case in point: There are other blockchain start-ups, such as R3, doing exactly the same thing as Ripple the company without their own tokens. Contrary to popular belief, a blockchain can be developed and used without a cryptocurrency supporting it.

Investor takeaway

When you buy bitcoin, you're buying a piece of the bitcoin network. Ditto for ether tokens and the corresponding Ethereum network. But when you buy Ripple the cryptocurrency, you're not actually buying anything related to the corresponding blockchain -- not even the potential for its success. Crypto investors shouldn't take that lightly.