When I heard of the new method of uploading my picture, I immediately tried it. What I remember is that I clicked the "Change picture" link that slides up when I hover my account picture, then clicked the "Upload new picture" button, indicated the picture's link, and... presto! Profile pic changed (except after that, some complications happened, well...).
And now I've decided to upload another picture. I've done what I did before, but then, the original "custom-uploaded" picture's gone! I was thinking that I'm uploading a new picture (that is, it doesn't replace the original picture), just as the button says so.
Of course there is that "Change your picture" header in the pop-up. But I think, context-wise, it is just referring to choosing the picture you want to show (the gravatar or the custom-uploaded).
I believe the button's label is quite misleading.