Under the Spotlight Wall St: Marathon Digital Holdings Inc (MARA)

When Satoshi Nakamoto originally published his white paper on Bitcoin in 2008, crypto was deeply rooted in the open source community. The idea of patent hoarders being key to the maintenance of the Bitcoin network would have been seen as far-fetched at the time. Yet taking on this role has been central to Marathon Digital Holdings’ ($MARA) success.

Marathon was founded in 2010 to acquire patents in the technology sector and profit from licensing agreements in digital rights management, e-commerce and cybersecurity. They were the parent company of Uniloc, a developer of a product activation tool that aimed to reduce software piracy. After settling a lawsuit over this piracy product with Microsoft ($MSFT), its patent was invalidated in 2016 and its patent business struggled to gain traction.

Still a nascent industry, crypto had a somewhat low barrier to entry, and after seeing the rapid growth and disruptive potential of cryptocurrencies, Marathon Patent Group made a strategic decision to enter the cryptocurrency mining industry. In early 2019, the company announced its transition into crypto mining and subsequently rebranded as Marathon Digital Holdings to reflect its new focus.

Gearing up

The decision to start mining cryptocurrency was driven by several factors. Firstly, Marathon observed the increasing adoption and rising values of cryptocurrencies. In particular, bitcoin presented an opportunity to generate substantial consistent revenue through mining operations. Secondly, the company recognised the favourable market conditions, including the growing institutional interest in crypto and the rising demand for mining services.

In October 2019, the company announced the purchase of 6,000 of Bitmain's latest generation Antminer S9 ASIC, an application-specific integrated circuit designed especially to mine bitcoin. This was a strategic move aimed at developing substantial mining capacity and operational efficiency. In December 2019, Marathon disclosed the miners had been fully deployed and installed, marking a significant achievement in its transition from a patent acquisition company to a fully operational cryptocurrency miner.

Scaling fast

Nowadays, Marathon has over 149,000 miners deployed in eight facilities across the U.S. and the United Arab Emirates (UAE). Together, they have a hash rate of 17.7 exahashes; that is, each second they’re able to make 17.7 quintillion attempts at solving bitcoin’s hashing algorithm, validating a new block of transactions on the blockchain and receiving the associated fees and newly-minted bitcoin.

Marathon’s operation has scaled up at jaw-dropping speed, becoming one of bitcoin’s most important miners in less than four years. Today, the mining colossus is responsible for 4.5% of bitcoin’s total hash rate, producing an average of 24.4 bitcoin per day. These numbers should grow if the company achieves its objective of reaching 23 exahashes of mining power by the end of the year. If that goal is met, then Marathon should be able to produce between 66 and 78 bitcoin a day (depending on mining difficulty), and account for about 7.1% - 8.4% of the network’s hash rate.

Exposed

From 2021, the U.S. Securities and Exchange Commission began to crack down on crypto companies, bringing in much stricter regulatory oversight to tokens and crypto exchanges. This move was a major factor behind cryptocurrency prices plummeting, with more than US$1.5t erased off the industry’s total market capitalisation in two months from an all time high of US$3.1t in November 2021. 

Marathon does sell bitcoin from time to time to fund its operations and they are exposed to shifts in its price. Currently, there are more than 12,500 bitcoin (roughly US$380m at the current market price) on its balance sheet. While that indicates significant commitment towards the network’s success, it is also a potential risk for the firm. 

Furthermore, with almost all of the crypto giant’s mining rigs deployed in the states of Texas and North Dakota, changing regulations in the U.S., droughts and volatility of energy prices could severely harm the company’s business. However, the crypto miner is always looking to expand internationally, wherever it can find cheap energy and friendly regulations, as demonstrated by the company’s still pre-operational joint venture in the UAE, which is projected to reach 7 exahashes of mining power.

Weathering winter

Riding out a crypto winter (as the industry’s prolonged bear markets are called) is a tough task for any company working in the ecosystem, but Marathon seems to be making good progress. In Q1 2023, it mined 2,195 bitcoin, a 41% increase when compared to the previous quarter, and its installed hash rate jumped a whopping 69% compared to Q4 2022.

Marathon remained unscathed by the downfall of Silvergate Bank earlier this year, one of the first U.S. regional banks that catered to crypto companies to wind down its operations. The mining behemoth also managed to increase its cash position by US$12m, up to a total of US$124m, and reduce its debt by US$50m to US$734m in long-term liabilities.

Building one of the world’s biggest crypto mining companies has not been smooth sailing, though. Despite revenues totalling US$51.13m in Q1 2023, Marathon still faced net losses of US$7.23m in the period and is yet to register a profitable quarter. The company’s investment program to acquire and deploy mining rigs is one of the key drivers behind this situation. Considering the breakneck speed with which new and more efficient crypto ASICs are being developed, Marathon might face trade-offs between being able to earn a profit and keeping up with the competition in the future.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.