Marathon’s Bitcoin Mining Strategy Only Makes Sense If No One Else Mines

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Marathon Digital (NASDAQ:MARA) stock has lost some steam lately. Yes, MARA stock is still up several thousand percent over the last year. Long-term owners have been rewarded in spades. The momentum has slowed more recently however, with shares falling around 66% from their recent highs.

Concept art of crypto mining with little figuring and a Bitcoin (BTC) token.

Source: Shutterstock

At first glance, that might seem surprising. Despite significant hits in the last day, cryptocurrencies remain extremely popular. Ethereum (ETH-USD) just hit new records, and Dogecoin (DOGE-USD) is positively taking the world by storm. Bitcoin (BTC-USD) isn’t faring that badly either. With all that in mind, you’d think crypto mining stocks would be buzzing.

Instead, it seems the recent Coinbase (NASDAQ:COIN) stock listing took away some of the interest. COIN stock absorbed a lot of capital from the crypto stock space, leading to a short-term decline in other crypto names like Marathon and Riot Blockchain (NASDAQ:RIOT). And now Coinbase stock itself has turned downward, causing sentiment to further sour. So will MARA stock get back on track?

Huge Future Profit Potential … On Paper

Marathon in theory has a tremendous profit opportunity. According to a recent investor presentation, Marathon will be a financial powerhouse in coming years.

Based on current projections, Marathon assumes the following once its mining rigs are all deployed. It believes its 103,120 miners will produce 10.37 ExaHashes (EH) per second. An ExaHash, to be clear, is one quintillion hashes. This would be tremendous. Current mining capacity globally is around 175 to 200 EH/s, meaning that Marathon would make up more than 5% of total mining capacity. This would translate into Marathon producing an estimated 55-60 Bitcoins per day.

Per Marathon’s calculations, it would cost just $4,541 per Bitcoin, on average, to mine these. Throw a $60,000 price on every one sold, and the company would be seemingly minting money. At a $60,000 sales price, Marathon would generate $103 million in monthly revenue and $87.2 million in monthly profits, it calculates. Annualize those figures, and the business would generate around $1 billion annually in mining profit. Even after overhead, financing costs, taxes and the like, Marathon would be doing quite well indeed if these projections pan out.

Marathon Isn’t The Only Company Scaling Up

The issue with Bitcoin mining has been and continues to be increasing mining capacity. Mining firms’ projections always look good because they assume higher future production capacity set against today’s global hashrate. However, the hashrate goes up dramatically over time, particularly whenever the price of Bitcoin spikes.

On Jan. 1, 2017, for example, Bitcoin cost just under $1,000. Meanwhile, the hashrate was 2.5 EH/s. Since then, BTC’s price is up 60x. However, the mining difficulty has actually gone up 80-fold over the same period to 200 EH now. Thus, mining difficulty actually scaled up slightly faster than Bitcoin’s price. Put another way, there’s no free lunch. Whenever the price jumps, mining consortiums react by putting more gear to work to exploit that profit opportunity. This is arbitrage, pure and simple.

In a theoretical world where Marathon was the only company that could deploy new mining rigs when Bitcoin rallied, it would make a killing. However, in the real world, everyone else will react in the same way, driving down profit margins across the board. The majority of the world’s Bitcoin mining operations have set up shop in places with cheaper electricity, such as China. It remains unclear if mining firms like Marathon will be able to compete.

Another thing to keep in mind is that Marathon’s financial projections are based on the key concept of when all its mining rigs are functional. That’s not expected to be until 2022. Why can’t it get all its desired mining gear set up sooner? That’s because it’s in line, along with so many other mining shops, to get new equipment delivered from suppliers. What happens when all those other mining clients in line turn on their own newly ordered equipment? That’s right, the hashrate goes up and thus Marathon’s share of the profit pool will diminish.

MARA Stock Verdict

MARA stock remains a play on the price of Bitcoin. I’m skeptical its mining ambitions will ever amount to much in the way of sustainable profits. That said, its recent move to buy a bunch of Bitcoin on the open market (which is far easier than actually mining it) has made MARA stock a direct bet on Bitcoin.

While Marathon mined fewer than 200 bitcoins last quarter, it now holds more than 5,000 on its balance sheet due to its heavy purchases of BTC from the exchanges. In that way, if Bitcoin keeps soaring, MARA stock should ride the value of its 5,000 Bitcoins higher. Still, though, don’t get caught up in the excitement around its potential 2022 mining profits. By the time it gets all its mining gear plugged in, the competition will have done so as well, likely causing profits to fall far short of everyone’s expectations.

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.

The post Marathon’s Bitcoin Mining Strategy Only Makes Sense If No One Else Mines appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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