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Marathon Digital (NASDAQ:MARA) is quickly reaping the benefits of its transition from its data center in Hardin, Montana, to its new King Mountain wind farm located in Texas.
That, with more new locations, has brought thousands of more miners online, adding about 2.0 EH/s to its mining capacity, bringing the total to 5.7 EH/s.
Along with a further update on its most recent numbers, in this article we’ll look at the difference between the strategy of MARA versus the strategy of Core Scientific (CORZ), and the pros and cons of each, helping to define how to better view MARA.
I’ll also give my thoughts on whether or not it would be advisable for MARA to take advantage of the financing offered to the Bitcoin mining sector via Binance Pool, as well as comments on the recent interest rate numbers and the probable response of the Federal Reserve.
Most recent numbers of Marathon Digital
In early October MARA released it latest production numbers, showing it had almost doubled Bitcoin production from August to September. In August the Bitcoin (BTC-USD) miner produced 184 Bitcoins, and in September it mined 360 Bitcoins.
Again, the increase was primarily from starting to scale operations in Texas after the transition from Montana. Part of that improvement was also the consequence of the loss of power at its Montana facility in June.
With the company adding approximately 19,000 more miners, it has boosted its EH/s by 2.0 exahashes to 5.7 EH/s. As of October 5, 2022, the total operating mining fleet of the company was about 57,000 active miners. Including the 184 Bitcoin produced in August, it brought its total holdings to 10,311, representing a fair market value of $206.7 million. As of the end of September the number of Bitcoin held increased to 10,670 with a value of close to $207.3 million.
MARA’s strategy vs. CORZ’s strategy
For the purpose of understanding the business model MARA is using, I think it’s worthwhile to compare it to Core Scientific’s strategy. In the case of MARA, it decided to hold on to its Bitcoin, while CORZ has chosen to go the route of selling its Bitcoin in order to raise capital. Each of these models have strengths and weaknesses. Concerning MARA, its decision to hold on to its Bitcoin positions it for some great long-term revenue generation once the price of Bitcoin reverses direction and resumes its upward trajectory. If it’s able to endure the crypto winter it will come out of it in a position of strength, remembering that Bitcoin miners are leveraged to the price of Bitcoin and, for the most part, have their share prices increase by a much higher percentage than the price of Bitcoin increases. MARA in particular has historically soared when the price of Bitcoin jumps.
One of the reasons I believe MARA chose this route is because it can’t compete with the production level of CORZ at this time, which by the end of 2022 projects a mining capacity of 2,000 Bitcoins per month. While MARA is increasing its EH/s rapidly, it won’t be able to match those totals anytime soon.
Why that matters is, if CORZ is able to achieve its goal it will be able to quickly boost its Bitcoin holdings based upon the 2,000 per month total. That means in approximately five months or so it could add 10,000 Bitcoins to its base holdings if it chooses to. On the other hand, MARA, by holding on to its Bitcoins, can continue to increase production capacity while enjoying the fruits of its holdings over time.
That doesn’t mean MARA will never sell its Bitcoins, as a prolonged period of downward pressure on it could force the company to raise capital that way. I don’t think that’s how it’ll play out, but any type of Black Swan could disrupt that thesis in the challenging economic conditions we’re now in.
A last thing to consider with MARA vs. CORZ is the possible tax implications of selling Bitcoin. CORZ could be paying significant capital gains taxes, assuming it’s selling at a profit. MARA, because it’s holding on to its Bitcoins, doesn’t fact the same taxable event.
That’s also why some Bitcoin miners choose to use some of their Bitcoin holdings as collateral to borrow money, because it’s cheaper to pay back interest-bearing loans than it is to pay capital gains taxes.
Binance Pool’s lending project
Binance (BNB-USD) recently announced it was providing access to $500 million in loans to companies in the Bitcoin mining sector via its Binance Pool.
Terms and conditions of the loans include a term of 18 to 24-months; and interest rates between 5 percent and 10 percent; and companies are required to offer “security, either physical or digital assets, satisfactory to Binance.”
The reason I bring this up in regard to MARA is it probably fits, better than most, the type of customer Binance is looking for. While not all collateral would be in Bitcoin, the fact MARA holds among the largest number of Bitcoins among miners in the industry makes it an attractive loan candidate for Binance Pool.
Again, investors need to consider the difference in costs and tax liabilities of a loan against selling off Bitcoins to raise additional capital.
One thing that wasn’t clarified in the press release was what determined the difference in interest rates between loans being offered. A five percent interest rate – whether in the short or long term – requires a far less payment than a ten percent interest rate would.
My point in mentioning this is MARA would almost certainly qualify for a loan if it chooses to go this route. That would allow it to retain and grow its Bitcoins while allowing access to operational capital.
This isn’t to suggest it’s the only loan option for MARA, but that it does potentially provide another avenue to access to capital if it needs it.
CPI, interest rates, and the Fed
In October the latest CPI numbers came in, and the 8.2 reading was slightly down from September’s numbers. I think the market was hoping for a wider decline in order to get a clearer direction on what the near-term interest rates were likely to be.
Since there was no meaningful breakdown, it’s almost certain the Fed will boost interest rates by another 75 basis points in November. Anything less than that would be a big surprise. The chance for that happening is almost zero.
Even if the CPI was a little lower, I think the Fed was committed to the 75 BPS hike. I’m not sure why, but I already hear talk of the market getting slammed once the rate hike is announced. I say that because the market was already pricing that in; it will be no surprise whatsoever when the hike is confirmed.
As usual, there will probably be the usual knee-jerk reaction that punishes the price of Bitcoin and Bitcoin miners, but soon afterwards the price of Bitcoin should rebound and continue on with its consolidation.
Almost all asset classes are moving in correlation with the CPI, interest rates, and the Fed’s response to them. That’s not going to change anytime soon, and until we start to see sustainable declines in the CPI, the share price of MARA is going to remain volatile and choppy.
Conclusion
While we wait for Bitcoin to return to its upward growth trajectory, MARA has been taking the right steps in increasing its EH/s. The Bitcoin mining segment is becoming increasingly competitive, and MARA is positioning itself to grab a larger production share, which will leverage nicely to the price of Bitcoin when it rebounds.
I like its strategy of holding Bitcoin in anticipation of the inevitable increase in value of the flagship crypto. The one downside is it may go the route of raising capital by increasing its share count, which would of course dilute shareholders. But even under those conditions, MARA’s share price has historically soared under bullish conditions, and I believe that will more than compensate for dilution if it further goes in that direction.
The bottom line for MARA is it has access to capital if it needs it while continuing to grow its EH/s and Bitcoin mining capacity. Patient investors should reap strong rewards if they continue to hold their shares.
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