Why experts call Kodak’s new bitcoin scheme a scam
11 Jan 2018

A number of critics have questioned the credibility of Kodak’s planned bitcoin mining venture, which was unveiled on Monday.

Shares in the US-based photography firm soared when it announced it would be launching a cryptocurrency Kodakcoin and also Kashminer, a bitcoin mining facility at its New York offices.

The latter scheme would require customers to pay upfront to use the platform and make monthly earnings.

However, a number of experts have strongly criticised the programme, according to Buzz Feed, which referenced a brochure linked to KashMiner.

It reportedly stated that investors who paid $3,400 upfront to rent the devices would get back about $375 monthly over two years ‘if bitcoin averaged a price of $14,000 in that time frame.’

It added that the licensing company would take in 50% of the cryptocurrency mined, and pay for costs like insurance and electricity.

Saifedean Ammous, assistant professor of economics at Adnan Kassar School of Business, Beirut, has calculated that bitcoin would have to maintain an average price of $28,000 deliver the brochure’s suggested returns of $375 a month or $9000 over two years.

In an email interview with KYC360, Ammous explained that: “Having studied many mining hosting proposals, this one is among the worst I’ve seen.

Nobody with experience in Bitcoin mining would invest in it. They project returns based on the difficulty and the price staying constant, but do not inform the investor that the price can vary widely, up or down, and that the difficulty will almost certainly go up, and most likely very significantly.”

“Each increase in difficulty reduces the yield of the miners. But since the investor paid for the machine upfront, the 50% cut for Kodak is still very profitable no matter what happens. I could easily get any investor a much better deal than this,” he said.

Ammous also said: “For outsiders, the returns from entering Bitcoin sound very enticing, and that opens an opportunity for people to prey on them by offering them lopsided deals where the investors take on the entire risk. This is why the space is rife with scams. People who refuse to learn and understand what they are doing will just have to learn the hard way.”

KYC360 also contacted Nicholas Weaver, a lecturer at the University of California, Berkeley, who said: “It is a scam, because it rests on two flawed fundamental assumptions: That the Bitcoin price remains high AND the Bitcoin mining rate remains constant. Neither assumption is realistic.”

“Bitcoin mining is a ‘red queen’s race’, that is, you have to keep running faster to stay in the same place. If the Bitcoin price remains high, what simply happens is you get more miners in and, in equilibrium, basically a good 1/3 to 1/2 of the mining revenue just ends up going to pay power bills and a good fraction of the rest goes to pay depreciation on the mining rigs.”

“So two things may happen,” he explained, “Bitcoin’s price drops, in which case the profit goes away, [or] Bitcoin’s price stays high, in which case more miners enter and the profit goes away.”

Weaver said that those who invest in the project could lose their money if it failed to deliver what it had promised. He said in an email interview:

Bitcoin’s price is really defined by the “net influx of new belief”, every new mined coin (currently 1800 BTC/day) needs to be matched by a corresponding influx of new dollars to pay for it (to pay for the power bills). In the past bubbles this was basically organic.

But now, a lot of the “new” money isn’t actually dollars, but a crypto-currency called “Tether”, produced by one of the Bitcoin exchanges that got cut off from banking. Tether is supposedly backed 1-1 with actual dollars, but that makes absolutely no sense, as in the past 3 months they’ve printed over 1 billion dollars in new Tethers.

Since the Bitcoin price has averaged roughly $10K/BTC over those three months, and needing a net influx of $1.6B to accommodate the newly minted coins, this suggests that 2/3rds of the “new” money supporting Bitcoin price is not actually money.

As soon as there is a bank run on Tether there will probably be a massive crash on Bitcoin price.

KYC360 made efforts to reach Kodak about the criticisms, but they did not respond.

The full Buzz Feed article can be viewed at buzzfeed.com.

The full Buzz Feed article can be viewed at buzzfeed.com.

Related topics:

Kodak to launch bitcoin mining and cryptocurrency Kodakcoin

Bitcoin price tumbles after rocky week of hacking, investigation reports

Bitcoin in Australia – year ends with a bang

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