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'Bitcoin cash' potential limited, but a catalyst could be looming for it to take off

  • 'Bitcoin cash' may not have long-term potential, industry insiders told CNBC.
  • But if the promised upgrade to the core bitcoin network doesn't end up happening, this could be a boost for 'bitcoin Cash'.
  • It hit a high of just over $727 on Wednesday before more than halving to just over $310 in the space of a few hours.

"Bitcoin cash," the cryptocurrency created as a result of a split in the bitcoin blockchain, may not have long-term potential, industry insiders told CNBC, but a key event down the road could give it more backing.

To recap, the underlying bitcoin technology known as the blockchain underwent a "fork", meaning it split to create a new digital currency. This happened because the community disagreed on how to increase the capacity of the blockchain, which was struggling with record-high transaction times for bitcoin.

As a result of the split, "bitcoin cash" was created. And it has had a volatile start. It hit a high of just over $727 on Wednesday before more than halving to just over $310 in the space of a few hours, according to price tracking site Coinmarketcap.com.

Many experts said there would likely be some short-term trading activity, but have expressed doubt over the longer-term potential of "bitcoin cash".

"Over the longer term, Bcash's prospects are limited due to the relatively small size of the community maintaining its blockchain, developing its software and using the cryptocurrency," Aurelien Menant, founder and CEO of cryptocurrency exchange Gatecoin, told CNBC by email.

Menant said Gatecoin would start supporting trade with "bitcoin cash". This is in contrast to Coinbase, the world's largest bitcoin exchange, which decided not to support the new cryptocurrency.

In a Tweet on Tuesday, Coinbase CEO Brian Armstrong, said we "don't want to rush anything out," highlighting the uncertainty over "bitcoin cash's" future.

But the continuing debate over the underlying bitcoin technology continues. The fight was over how much to increase the block size of the blockchain.

To understand this, it's important to outline how transactions work. Transactions by users are gathered into "blocks" which is turned into a complex math solution. So-called miners, using high-powered computers work these solutions out to determine if the transaction is possible. Once other miners also check the puzzle is correct, the transactions are approved and the miners are rewarded in bitcoin.

Increasing the block size would boost transaction speeds. Some people wanted a solution that would dramatically increase the block size from its current 1 megabyte level. But the majority of the community have decided to increase the block size to 2 megabytes.

A full recap of what has happened can be found here. This 2MB increase is likely to come into effect in November, providing miners stick to their word and make the necessary software updates.

If this doesn't happen, then "bitcoin cash" could get a boost.

"If most miners decide that for economic reasons they prefer to mine larger blocks and commit more hashing power to Bcash, then it's likely more development work and user adoption would follow, and those conducting business with bitcoin may decide to adopt Bcash instead," Menant said.

"Yet for this to happen Bcash would need to prove that its technology can match the security features and reliability of bitcoin's software," he added, striking a note of caution.