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This Is Why Experts Are Calling Kodak's New Bitcoin Scheme A Scam

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The annual Consumer Electronics Show (CES) can be a showcase of invention. Each year, giant corporations from around the world flock to Las Vegas to breathlessly debut their latest technologies: a huggable robot, a passenger drone, an Internet-connected toilet.

The exhibition can also be one of reinvention, where a company taking its final breaths makes a last ditch attempt to save its business by hitching itself to the latest tech trend.

On Tuesday, the Eastman Kodak Company, established in 1888, did just that, unveiling a series of partnerships to associate its venerable brand with the wild new world of cryptocurrency. Kodak announced that it would be launching its own digital money, Kodak Coin, while one of its licensees was showing off a bitcoin mining device called the Kodak KashMiner, a specialized computer that’s used to earn bitcoin.

For a company that emerged from bankruptcy in 2013 and had a market capitalization of around $135 million on Monday, it was a last gasp at being relevant — and it worked. Kodak’s stock price has nearly tripled since those announcements.

Critics, however, are already calling it a scam, taking advantage of a period when investor FOMO clouds the cryptocurrency industry. It’s a time when an iced tea company can add “blockchain” to its name and more than double its market valuation, or an online file storage startup can raise $257 million by issuing its own virtual tokens.

“It’s an economy of easy money and people with fancy buzzword salads can more or less find a way to earn that money,” said Saifedean Ammous a economics professor and author of The Bitcoin Standard. “There is a massive speculation bubble.”

Ammous and others took specific issue with the Kodak-branded bitcoin miner that suggests potential investors could obtain a certain rate of return if bitcoin’s price remained steady. CES brochures of the Kodak KashMiner said that customers who paid $3,400 upfront to rent the devices, would receive a payout of about $375 per month for the next two years if bitcoin averaged a price of $14,000 in that time frame. The brochure noted that the licensing company would take in 50% of the cryptocurrency mined, while paying for insurance, maintenance, and electricity (bitcoin mining is extremely power hungry) while they are reportedly stored at Kodak’s Rochester, New York headquarters.

“Kodak has multiple plans in the blockchain industry,” said Halston Mikail, an executive at Spotlite America, whose company licensed Kodak’s name for the bitcoin mining device. “We have a team that’s well experienced,” he added, before noting that Spotlite does not make the device and buys them from an unnamed Chinese manufacturer.

“It’s mind-bogglingly stupid.”

Ammous disputed that experience, saying that the project “would be laughed out the door by anyone who is serious in bitcoin” and that it “betrayed a serious lack of knowledge about bitcoin.”

The problem, he noted, was that the KashMiner proposal doesn’t take into account basic principles of the cryptocurrency. The bitcoin protocol will only release a fixed amount of cryptocurrency per day. As more miners — computer programs that run complex calculations to earn bitcoin — are added and compete with each other, these computations become harder and require more power. To expect computing speeds, known in the cryptocurrency world as “hash rates,” to remain steady “is ridiculous,” said Nicholas Weaver, a lecturer at the University of California, Berkeley.

“Over the last 6 months as more people have started to mine bitcoin, the hash rate has more than doubled, meaning you receive half as many bitcoins for the same amount of computing power,” Weaver said.

Nicholas Rangel, a Kodak spokesperson, refused to answer questions about the calculations that went into the marketing brochure, which featured an all-caps tagline “IN MATH WE TRUST.” He said that the company would make an official announcement about the program in two to three weeks and also declined to say what company actually made the machines.

Ammous pointed to very similar looking bitcoin mining machines, like the Chinese-made Antminer S9, that can be bought on Amazon for around $6,000, and then physically hosted at special mining facilities that charge for space and electricity. (Given the noise and energy consumed by the devices, it’s typically impractical to store them at home.) He said the notion that the company was keeping 50% of mining proceeds “absurd” given current industry rates, and calculated that bitcoin would have to maintain an average price of $28,000 to offset the expected increase in computing difficulty and deliver the brochure’s suggested returns of $375 a month or $9000 over two years.

“Kodak as a company is a shell that has nothing to do with what it used to be,” said Weaver, noting that the company had moved away from the photography products that had made it an iconic American brand through most of the 20th century. In licensing its brand, for example, Kodak’s name can now be found on Spotlite America-sold solar panels, energy systems, and inverters.

It’s also on a new cryptocurency, Kodak Coin, which will be the basis of payment on a new image rights management platform called KodakOne. According to its announcement, KodakOne, which is being developed in a partnership with WENN Digital, will use blockchain technology to “create an encrypted, digital ledger of rights ownership for photographers to register both new and archive work that they can then license.”

“It’s mind-bogglingly stupid,” said Weaver. “Why would you need a dedicated cryptocurrency to pay for stock photos? I’m pretty sure most photographers want actual cold, hard money.”

“Companies in the real world don’t issue their own currencies for a reason,” said Ammous. “If you want to sell a good, you use real money. Imagine if you had a separate currency for Kodak, Microsoft, Apple and your super market.”

The concept may not even be a new one. On Wednesday, Ars Technica found documents that suggest the KodakOne platform and associated digital money is just a rebranding of a failed earlier project from WENN that licensed paparazzi photos.

Kodak’s shareholders did not seem to care. Following a monster rally on Tuesday, the company’s stock ended trading on Wednesday up more than 56% to $10.65 per share. In addition, shares in a Canadian company known as Global Blockchain Technologies Corp. experienced a similar jump of 51% on Wednesday, after it said it would invest $2 million into KodakCoin.

When asked if he thinks real people would invest in the Kodak-branded mining scheme of its initial coin offering, Weaver seemed resigned to the notion.

“I think they might find some suckers,” he said. “It’s just a global investor delusion right now and a lot of people are going to get really hurt.”

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