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Bitcoin split could hurt wider adoption of the currency, increase volatility

  • Bitcoin is set to undergo a possible upgrade on Tuesday that would see the digital currency split into two.
  • The move aims to improve the digital currency's network capacity and transaction efficiency.
  • The advice from most bitcoin experts is to hold onto their new tokens.
Mock physical bitcoins arranged on a table.
Chris Ratcliffe | Bloomberg | Getty Images
Mock physical bitcoins arranged on a table.

The bitcoin rift set for Tuesday could hurt efforts to increase adoption of the currency, and could also increase its volatility, some tech leaders said.

Bitcoin is set to undergo a possible upgrade on Tuesday that would see the digital currency split into two — the original bitcoin, as well as a completely new asset, Bitcoin Cash.

The move aims to improve the digital currency's network capacity and transaction efficiency. However, it could also hurt bitcoin's long-term prospects, according to Vinny Lingham, CEO of tech start-up Civic.

"My biggest concern with bitcoin being split at this point is just the brand dilution of bitcoin," Lingham said.

Bitcoin's brand has contributed to its relatively high stability as a cryptocurrency thus far, according to Lingham. "You always had the situation where you knew which bitcoin you wanted," he said.

"But having a fork at this point, you have two bitcoins."

And this situation could be confusing for consumers, he said, which might threaten efforts to expand adoption and usage of bitcoin.

However, others are supportive of the split. Anatoliy Knyazev, co-founder of investment company Exante, told CNBC he is in favor of these kinds of splits as they are how bitcoins and other cryptocurrencies are supposed to work.

"(This is) decentralized governance in action. Anyone can try to lead and the market will figure it out," he told CNBC via email. He recommends bitcoin investors hold their new tokens for the time being.

How will the split affect the price?

Bitcoin prices are also likely to become more volatile, according to Dominic Williams, president at blockchain computing firm DFINITY. He believes that the new strand, Bitcoin Cash, is likely to trade at around 10 percent of the price of bitcoin.

"That may not impact the bitcoin market (capitalization) very much, but if it looks like Bitcoin Cash is gaining momentum and people want it, we could see some major volatility and swings between the two versions of the currency," he added.

On Monday, future values for the new cryptocurrency were listed at $292.42 on website Coin Market Cap. Bitcoin was trading at $2,837.91, close to its all-time high.

Should the split go through, all direct owners of bitcoin will hold both versions of the currency.

The value of Bitcoin Cash will depend on several factors, according to Garrick Hileman, research fellow at the Cambridge Centre for Alternative Finance.

"The price level will depend on an interplay between how much mining support Bitcoin Cash attracts, which platforms support Bitcoin Cash, how much selling pressure and buying support we see, and other factors," he told CNBC via email. Mining is the process of creating new bitcoins and verifying bitcoin transactions.

Hileman says the support for Bitcoin Cash is being driven by financial opportunism, with some seeing it as "free money."

Should bitcoin investors hold or sell these new tokens?

The advice from most bitcoin experts is to hold onto their new tokens.

"You receive Bitcoin Cash for free and there is no reason to give them up," Bram de Haas, managing editor of The Black Swan portfolio, told CNBC via email. "There appears to be decent support in Asia."

However, others plan to get rid of their tokens quickly, either for the initial profit or to show their support for the original bitcoin. Erik Voorhees, a bitcoin advocate and entrepreneur, declared this on Twitter as his reason for dumping Bitcoin Cash.

The new token will be almost like a free dividend, according to Charles Hayter, founder of digital currency comparison website CryptoCompare. He says the current bitcoin price is trading with this dividend priced in.

"When the fork occurs it can be expected that the price of bitcoin will drop by the price of Bitcoin Cash, however these are crypto markets and nothing is ever certain," he told CNBC via email.

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