Stock Market

Marathon Digital’s Bitcoin Story Faces Some Serious Questions

Marathon Digital (NASDAQ:MARA) has been one of the single biggest winners of the past year. Incredibly, over the past 12 months, MARA stock is up more than 12,000%. Some of that is due to how low shares plunged during March of 2020, of course. But the run has been incredible regardless. As recently as November, MARA stock sold for $2. Now it’s in the high $40s.

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The reason for the recovery is pretty clear: Bitcoin (CCC:BTC-USD) is back. Last year, crypto’s star had dimmed a bit. But now, with aggressive central bank actions to bolster the economy, traders fear inflation and are buying assets such as Bitcoin as hedges. Marathon Digital, a Bitcoin mining company, has naturally benefitted from the abrupt change in sentiment. However, speculators have gotten ahead of themselves in MARA stock.

Marathon Is Still a Tiny Operation

Judging from the stock price and market capitalization, you’d be forgiven for thinking that Marathon Digital is a major force in the crypto world. However, it’s not.

In Q4 of 2020, Marathon generated just 157 Bitcoins. That’s not nothing, to be clear, but it’s also not much in the grand scheme of things. Even at a $50,000 price, that’s less than $8 million in revenue if Marathon had sold all the coins into the open market.

During that same quarter, in addition to normal operating costs and overhead, Marathon suffered a $1.2 million loss from server depreciation, a $871,000 impairment on mining equipment and a nearly $1 million expense for server maintenance.

That gives a sense of how much of the proceeds from mining are consumed just in keeping the computer gear working. All told, Marathon ran up a large operating loss for the quarter.

The company is seeking to solve this issue by buying way more mining units and finally achieving real operating scale. We’ll see if that works in due time, but so far, the business model hasn’t proven itself.

Don’t Forget About Mining Difficulty

Bulls can wave away that previous concern. Sure, Marathon isn’t generating enough revenues yet. But won’t that change once the company gets all its new mining gear set up later this year? Actually, no, not necessarily.

One of the issues with Marathon (and other Bitcoin mining stocks) is the matter of mining difficulty. Miners devote computing power to solving cryptographic puzzles. When a mining group succeeds, it gets the prize.

As you may know, a certain amount of Bitcoin is generated every day. This figure doesn’t change, regardless of how much computing power is devoted to the task. Rather, the difficulty of the puzzles is adjusted to make mining more or less difficult. In Marathon’s projections, there is a great story. Devote this much more computing power to the situation, and it will earn this much more crypto.

However, in the real world, Marathon is not the only economic actor. With the price of Bitcoin up significantly over the past few months, many mining consortiums are devoting more resources to their operations. As everyone scales up their mining capabilities, it will lead to diminishing returns. After all, the speed at which new Bitcoins are minted isn’t going to change.

If Marathon were the only producer increasing its mining power, it’d have a golden opportunity to make a windfall right now. But, instead, it is likely to see its investments offset as other mining groups engage in similar behavior.

Trading, Not Mining, Will Drive the Stock Price

In Q4, you’ll recall, Mara generated 157 Bitcoins from mining operations. That’s not enough to move the needle. So, management cleverly came up with a way around that issue. It instead bought a ton of Bitcoins off the open market. Mara issued a bunch of its stock to the public. It then, in turn, used that freshly raised capital to go out and buy 4,813 Bitcoins at an average price of $31,000 each.

So far, this is looking like a great move on management’s part. Judging from the subsequent Bitcoin price action, the company has a large unrealized gain on that transaction. If Bitcoin keeps rising, MARA stock should go with it. While mining 150 or so Bitcoins a quarter isn’t going to do much for shareholders, owning nearly 5,000 Bitcoins in a roaring crypto bull market is another matter entirely.

That said, if the vast majority of Marathon’s value comes from it simply buying Bitcoin on the open market and hoping the price goes up, you have to wonder if it’s better to own this as opposed to a dedicated Bitcoin fund such as Grayscale Bitcoin Trust (OTCMKTS:GBTC). GBTC stock gives you exposure to a rise in the price of Bitcoin without having to worry about mining, operating costs, management capital allocation and the rest.

MARA Stock Verdict

This is a bit of a weird one. Marathon’s stated business model — mining Bitcoins and selling them for a profit — so far has failed to work out. However, by buying a ton of Bitcoin and holding it on its balance sheet, it has effectively turned into a speculation on the crypto market more broadly.

As long as Bitcoin keeps going up, MARA stock will probably go with it. I personally would rather express that bet with something like GBTC or Bitcoin futures, however. I’m skeptical that the mining business will ever make significant money. As such, if you want to bet on a higher Bitcoin price, there are less complicated ways to do that.

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

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.