Stock Market

Bitcoin Is Marathon Digital Holding’s Greatest Strength and Greatest Weakness

Marathon Digital Holdings (NASDAQ:MARA) formerly Marathon Patent Group continues to be one of the hottest stocks of 2021. Since I last wrote about MARA stock a month ago, the Bitcoin (CCC:BTC-USD) mining stock is up another 60%. But as we know, that doesn’t mean the stock is 60% more valuable.

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The primary reason for the MARA stock rally is its high correlation with Bitcoin. And the digital currency is up over 90% for the year. However before you invest in Marathon it’s worth asking yourself if correlation equals causation. If it does, than the notion that what comes up must come down will apply. And that’s why prudence is warranted when investing in Marathon Digital Holdings.

Bitcoin $300,000?

In the only other article I wrote about Marathon, I pointed out that Bitcoin was birthed in a bull market. Since its arrival on the scene in 2009, the market has never experienced a sustained bear market. Investors realize that Bitcoin prices can fluctuate wildly in a bull market. But nobody knows with any degree of certainty what will happen to Bitcoin in a true bear market.

But this doesn’t mean that Bitcoin has not experienced “bearish” periods. Like many asset classes, Bitcoin has had its bitcoin winters as they are called in the crypto sphere. These are periods where the price of bitcoin comes down significantly. They have followed three to four year bull markets.

And according to Bobby Lee, co-founder and the former CEO of the crypto exchange BTCC, Bitcoin is at the tail end of one of these bullish periods. And that means the air could be ready to come out of the digital currency.

However, as Lee predicts, that’s not likely to occur until sometime in 2022. For the rest of 2021, Lee sees Bitcoin soaring to perhaps $300,000 by the end of the year. But it’s fair to ask, how far it could fall? Lee offers this thought, “…So after it peaks out…people should be aware that it could fall as much as 80% to 90% of its value from the all-time peak.”

Being Prudently Contrarian

That doesn’t mean a bearish winter is a certainty. Even Lee admits he’s not offering a definitive prediction. However it does mean that anyone investing in MARA stock should consider what could happen to their investment if Bitcoin were to make a significant drop.

And that brings up another truth about MARA stock. It has a high correlation with Bitcoin. Speculative investors may argue that’s the point. If it is, that’s great. But that correlation is likely to move in both directions. If Bitcoin sees a massive correction, the price of Marathon Digital stock will probably swing lower than the broader market.

A related point to this is that Marathon is tethered to Bitcoin, and only Bitcoin. Diversification is not a part of this company’s immediate plans. That looks great when Bitcoin is trading at nearly $60,000. However, once again you have to ask if there isn’t a more prudent investment strategy.

There Are Better Long-Term Options Than MARA Stock

An option that I like more than Marathon Digital Holdings is Canaan (NASDAQ:CAN), a manufacturer of cryptocurrency mining equipment. Canaan specifically designs the algorithm-specific-integrated-circuit (ASIC) powered rigs that bitcoin miners need in massive amounts.

Canaan is not alone in this sector. In fact, another company, Bitmain, recently sold 6,300 ASIC Miners to Marathon. Bitmain is not yet trading publicly. But that is likely to be changing soon. And Will Ashworth points out that if Bitmain goes public, the company may have a valuation as high as $50 billion. That’s over 10x Marathon’s current market cap.

However, I’m not saying that either Canaan or Bitmain are a better short-term option than Marathon. As long as Bitcoin continues to move higher,  MARA stock will continue to move right along with it. I’m just suggesting that prudence offers a different long-term approach.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.