@Judy508 Yeah, that's a delicate one. @Anonymous has already outlined, in precise detail, all of the main dilemmas that you face with doing this.
We are also new hosts and are trying to navigate our way through this very tricky (and guest-friendly) booking system. I mentioned in an earlier post this week how we had had guests who did not meet our minimum booking requirements (e.g. no government ID, no recommendations from other Airbnb hosts, etc.) were allowed to send us booking requests anyway. A couple of these were clearly groups of young people looking to party (one even said so), and after some of the horror stories we'd heard this past summer about crazy young people having trashed the places of friends we know who were hosting, we were not going to let them into our new place.
It was thus left to us to turn them down. I tried writing to Airbnb to explain, but of course, nobody reads those. And so we started off as new hosts with three acceptances and three refusals, which has us at a 50% acceptance rate.
So, I understand how you feel. If you cancel on them, this counts against you, regardless of your reasons. With them having blocked the camera, it would also be very, very hard to prove that they had sneaked the extra guest in. They may have violated your house rules, but if you had to try to prove this to Airbnb, then they would ask for evidence--which of course, you couldn't provide.
Given that, the best solution might be to relocate the camera where it can't be blocked or get a second one, if these options are possible for you. When we started hosting, our house manager, who is also a Superhost, strongly advised us not to let guests check in with a lockbox and to make sure that she would meet them when they check in and check out, despite the inconvenience. She explained that what you have just outlined here is exactly why we would need to do it that way. Again, I don't know if this is an option for you either, but it seems like you are going to have to come up with a new strategy to combat dishonest and sneaky guests.
Good luck!