Is Bitcoin facing a takeover? Investors are rattled as mining group gains control of half the currency's computer power

Bitcoins allow people to send money over the internet without using banks

Miners operate the computers that keep track of and create the currency



With 51% majority, GHash could in theory control the flow of transactions, freeze people out of the network and keep all future bitcoins for itself

GHash says it's committed to preserving Bitcoin as a trusted currency

But the fact that one player can amass control could undermine trust in the currency, which is worth only what people are willing to pay for it



Digital currency Bitcoin is built on the premise that it exists outside the control of any centralised power.

But now it is in danger of losing this credibility because of the growing power of a group that runs some of the computers behind it.

In recent weeks, a London-based 'mining pool' called GHash has amassed nearly half of the Bitcoin computing power and has briefly gone over 50 per cent.



In recent weeks, mining group GHash has amassed nearly half of the Bitcoin computing power and has briefly gone over 50 per cent. London-based 'mining pool' GHash could, in theory, control the flow of transactions, freeze people out of the network and keep all future bitcoins for itself.

WHAT IS BITCOIN?

Bitcoin is a distributed peer-to-peer digital currency that functions without any central authority, such as the Bank of England.

The currency was launched in 2008 and is traded within a global network of computers. Miners operate the computers that keep track of bitcoins and create additional coins. They pool their computing power to spread the financial risk of their operations. Bitcoins can be bought with near anonymity, which supporters say lowers fraud risk and increases privacy. But critics say that also makes bitcoins a magnet for drug transactions, money-laundering and other illegal activities. The value of bitcoins has fallen six per cent in a week to around $600 (£354) as the threat posed by GHash has become clearer, although the decline is within the range of normal fluctuations for the volatile currency. A bitcoin investor, Norwegian Kristoffer Koch, recently made more than half a million pounds after he forgot he bought £17 of currency four years.

This means GHash could, in theory, control the flow of transactions, freeze people out of the network and keep all future bitcoins for itself.

Although GHash says it's committed to preserving Bitcoin as a trustable technology, the mere fact that one player can amass majority control could undermine trust in the currency, which is worth only what people are willing to pay for it.

The value of bitcoins has fallen six per cent in a week to around $600 (£354) as the threat posed by GHash has become clearer, although the decline is within the range of normal fluctuations for the volatile currency.

Bitcoins allow people to send money over the internet without going through banks.



This means transaction costs are low, but it also means they're useful for illegal activities such as money laundering and drug sales.

Miners operate the computers that keep track of bitcoins and create additional coins. They pool their computing power to spread the financial risk of their operations.

Bitcoins have also become a target of speculators betting on a continued run-up in the currency. Its value has grown a hundredfold over two years.

From a technical standpoint, bitcoins are sequences of numbers, painstakingly produced by computers churning through millions of calculations.



Bitcoin transactions are recorded in a virtual public ledger, known as the blockchain. Miners are in charge of maintaining the blockchain.



As their computers perform the calculations to do that, the process rewards them with newly minted bitcoins.

Bitcoin transactions are recorded in a virtual public ledger, known as the blockchain. Miners are in charge of maintaining the blockchain. As their computers perform the calculations to do that, the process rewards them with newly minted bitcoins

A single mining computer might take years to produce a single block of coins, and there's no way to know when that might happen.



In pools, miners divide the bitcoins they create among themselves in proportion to the work done, providing with them with a steadier stream of income.

The pools aren't created to threaten the trust placed in bitcoin; it's a side effect of the pool's growth.

GHash is controlled by a British company, CEX.IO Ltd. The company said in a statement Monday that it wants to protect Bitcoin, but it doesn't want to turn away people from the pool or impose other temporary solutions to back away from the 50 per cent threshold.

GHash said it's arranging a 'round table' meeting of key players in the Bitcoin system in July to 'with the aim of discussing and negotiating collectively ways to address the decentralisation of mining as an industry.'

Eyal said the problem needs to be fixed in 'a very drastic fashion; to reduce the incentive to create pools.



That will probably be with an update to the software the underlies the system, he said.