Everything You Need to Know about Kodak's KODAKCoin

In 1975, an Eastman Kodak (NYSE: KODK) engineer invented the first digital camera. The company scuttled the project, hoping to delay the day when digital cameras might usurp film-based photography. But that decision left Kodak in the unfortunate position of playing catch-up in the decades that followed.

Perhaps having learned from its experience with digital cameras that timing is everything, Kodak isn't willing to let the boom in cryptocurrencies pass it by. The 130-year-old photography and film company plans to enter the digital currency and blockchain business, albeit somewhat indirectly, with hopes of breathing new life into its shares.

Here's what you should know about the most interesting story in finance today.

All about the KODAKCoin

Buying and selling the rights to use images and video is a big business, worth as much as $14 billion a year, according to estimates by Shutterstock (NYSE: SSTK). Kodak wants a piece of it: It announced that it will develop a platform for managing and selling the rights to pictures and other content.

In simple terms, Kodak will create an image and licensing marketplace (KODAKOne), and take a slice of every transaction for itself. But rather than build this business in a traditional way, Kodak is apparently going out of its way to use the "blockchain" to do it, according to its press release:

In other words, Kodak wants to do with blockchain what, say, Shutterstock does without blockchain. Photographers will be able use the KODAKOne platform to license their images to people and businesses that want to use them, and transact in KODAKCoin rather than traditional currencies.

In theory, people who want to buy the rights to images will happily go through the added step of converting their dollars or euros, for instance, to buy KODAKCoin, which they can then spend to license images and creative content from photographers. Photographers will apparently embrace the idea of getting paid in KODAKCoin, which they can then convert into their currency of choice.

There's fodder for skepticism in this setup: KODAKCoin just adds an extra step in the process of buying and selling the rights to content, making it more difficult, not easier, for buyers and sellers to meet.

Platforms for buying and selling the rights to photos and videos already exist, led by Shutterstock, iStockphoto, and AdobeStock. Shutterstock's regulatory filings reveal that it has 300,000 contributors. In the first nine months of 2017, the company reported that it generated more than 128 million paid downloads across its network.

Two-sided networks are notoriously difficult to build. Convincing photographers who currently enjoy getting paid in dollars on Shutterstock to join KODAKOne and get paid in KODAKCoin with uncertain value seems...well, a little difficult. But investors don't seem to care, if only because they're hyper-focused on the word "blockchain" to notice that the KODAKOne platform is just a more-complicated version of platforms that already exist.

But that's not all!

Perhaps the most amusing part about Kodak's foray into cryptocurrency is that it isn't stopping with its own digital currency. Kodak also plans to get into the business of mining other cryptocurrencies, such as bitcoin.

Bitcoin mining, the process of creating new bitcoins, is a fiercely competitive business. Bitcoin miners buy expensive electronic equipment that is specifically designed for the purpose of mining cryptocurrency. These "mining rigs" cost a lot of money up front, and keeping them active requires a lot of electricity to power them and keep them cool.

Not surprisingly, these rigs are commonly set up in Iceland and China, where electricity is cheap and plentiful. After all, when everyone is using the same rigs to mine digital currencies, a competitive advantage can only be derived by finding the cheapest power source.

As it turns out, electricity happens to be cheap and plentiful in Rochester, New York, where Kodak is headquartered. The electricity is cheap for Kodak specifically, because the company has a power plant on-site that, according to the BBC, can "power each [mining] rig for four cents per kilowatt hour, which is significantly cheaper than running a rig at home." For perspective, the average cost of residential power in the United States is approximately $0.12 per kilowatt hour.

But this is where Kodak's proposed business line takes another odd turn. Rather than risk its own capital on mining rigs, Kodak wants investors to pony up the $3,400 cost of the rigs in exchange for half of the rig's bitcoin production over a 24-month period. Its projections, already questioned by many familiar with the business of mining cryptocurrencies, call for the investor to receive $9,000 over the life of the 24-month investment, thus generating a net profit of $5,600. If such returns were possible, one wonders why Kodak would even bother to let others share in the profits, given that the supposed advantage is Kodak's low-cost power source.

If you're confused by all this, simply remove the "blockchain" label from Kodak's plans and you'll see them for what they are. Kodak's stock is surging because the company is creating an unnecessarily complicated network for buying and selling stock images, and, in a roundabout way, entering the low-return utility business through a questionable bitcoin-mining opportunity. Buyer beware.

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Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool recommends Adobe Systems and Shutterstock. The Motley Fool has a disclosure policy.