Like gold and gold miners, bitcoin miners are also a levered play on the price of bitcoin.
In layman’s terms, when the price of bitcoin goes up, the miners go up more.
The largest-scale Bitcoin miner in the US is Marathon Digital Holdings (MARA), and readers should take notice.
The stock is up over 1,100% in the past 365 days as the miner has ridden the elevator up with the price of Bitcoin.
Marathon has legs and doesn’t live in fear of them if you are a believer of Bitcoin like I am.
Deploying resources in this stock has some weight, especially after we received a 27% discount when the stock dropped after they announced a $650 million convertible senior notes offering to fund their purchases of additional Bitcoin miners.
Almost as important, they disclosed a Securities and Exchange Commission (SEC) subpoena that requested documents related to its data center contracts in Hardin, Montana.
Last year, Marathon reorganized itself as a Bitcoin mining company and placed a long-term order for more than 100,000 high-end ASIC miners from Bitmain.
At the end of 2020, Marathon only held 126 Bitcoins. But in March, it purchased an additional 4,813 Bitcoins for $150 million at an average price of $31,168.
This brilliant move in hindsight means they are playing with house money now.
Marathon operated 27,280 miners at the end of October, and it expects to expand its fleet to 133,000 miners by mid-2022.
But those miners cost more than $10,000 per unit each, and Marathon expects to remain unprofitable as it takes on more debt to fund those purchases.
Last year, Marathon only generated $4.4 million in revenue and posted a net loss of $10.4 million.
Marathon's $650 million senior convertible debt offering gives a chance for the company to grow out of its loss-making model.
It’s hard to run away from the exorbitant costs to expand its mining fleet, but once the scale is realized, it will be able to focus on earnings growth.
As for the SEC subpoena, it's related to Marathon's deals with Beowulf Energy and other parties to build a data center in Hardin last October.
In particular, the agency is investigating Marathon's issuance of six million shares of restricted common stock to fund those deals and might trigger problems for Marathon, since it relies on Beowulf's lower energy prices to mine Bitcoin at cost-efficient rates.
Even if something were to come from this, I doubt it will be a deal-breaker and maybe even a possible fine.
The silver lining is that Bitcoin must drop significantly for Marathon to become unprofitable.
They are doing everything they can to scale their business as fast as possible.
Taking on more leverage to corner the bitcoin miner supply market is scary for some people, but after the pandemic, much of this activity is normalized.
After factoring in energy and hosting costs, the breakeven rate on Bitcoin for Marathon is around $6,500.
Even though the company is levered, they are insulated by its unit economics.
Certainly, it’s expensive to scale in a fragmented market, and it’s not a guarantee that energy costs will be advantageous for Marathon in the long term.
As many have read, there are various breakdowns in the global energy market that could reverberate on Marathon’s balance sheet even if not yet.
The breakeven estimate serves as a reminder of how this is just a numbers game, and reducing the cost of energy makes it almost unfair to compete against.
Daily miner revenue is hovering near record highs, and Marathon has among the lowest mining costs per coin.
The stock has iron-clad support around $37, and I would be buying MARA stock incrementally all the way down to $37 if we ever get there.
I have a hunch that we will never dip below the low $40s.
