Marathon Digital: Poised To Ride The Bullish Bitcoin Wave In 2024

Summary Marathon Digital's December production report shows record Bitcoin production, hash rate increase, and transaction fee revenue growth. Marathon Digital has a strong cash position and plans for facility and equipment acquisition and expansion. The approval of a Bitcoin ETF and the upcoming halving event present opportunities for Marathon Digital to capitalize on transaction fees and increase its market value. Data by YCharts I last wrote about Marathon Digital ( MARA ) on August 9, 2023, when I covered the Q2 earnings result highlights. I was bearish on the stock at that time and maintained a “sell” rating. The stock price fell by ~40% in the three-month timeframe (as seen in the chart above) after that coverage but has since rebounded impressively, thanks to the momentum Bitcoin ( BTC-USD ) and other cryptocurrencies have garnered since Q4 last year, catalyzed by the anticipation of a spot Bitcoin ETF approval . On the operational front, Marathon has had a sequentially improved hash rate and number of Bitcoin produced monthly since my last coverage. Q3 results showed MARA’s energized hash rate increased by 8%, from 17.7 exahashes to 19.1 between Q2 and Q3. Quarterly Bitcoin production also went up by 19% in Q3. The improved numbers coupled with Bitcoin’s momentum have influenced MARA’s price surge these past months. As every Bitcoin miner prepares for the Bitcoin network halving event slated for April this year, the focus is mainly on how to compete efficiently for the main revenue source (mined BTC) which will be cut in half at the halving event. Factors like readily available cash for acquisitions to scale mining equipment and hash rate and operational efficiency become the key considerations to assess miners that could dominate post-halving and make the most efficient use of operating assets to generate the maximum amount of sales. With spot Bitcoin ETFs finally approved by the SEC, and the Bitcoin halving event slated for April, which comes with anticipated post-halving crypto price gains, 2024 is expected to be a bullish year for Bitcoin. The Bitcoin mining sector has already seen stock prices upswing since Bitcoin gained momentum in Q4 last year. Marathon Digital had an impressive 688% stock price gain last year, being the best performer among crypto-exposed stocks of companies valued at $5 billion and above. Recently, MARA has been breaking some production records (both internally established and industry-wide records) in terms of the number of mined Bitcoins, hash rate, and Bitcoins held in reserve. These factors coupled with the expected bullish trajectory for Bitcoin in 2024 give MARA a high asymmetric upside potential and a favorable risk-reward ratio among Bitcoin miners. Latest Production Update (December 2024) Marathon Digital’s December production report includes a record Bitcoin production of 1,853 BTC, which represents a significant increase both YoY and MoM This production level is a 290% YoY increase (475 BTC mined in December 2022) and a 56% sequential increase (1,187 BTC mined in November). The 1,853 BTC mined in December was a monthly record for the company, and the company also believes that December’s production is the highest monthly total produced BTC ever recorded by a public Bitcoin mining company. Marathon's average operational hash rate saw an 18%MoM increase, reaching 22.4 exahashes per second (EH/s), and the energized hash rate increased by 4% MoM to 24.7 EH/s. The company's share of available miner rewards increased by 19,700 bps YoY and 4,000 bps MoM to 5.1%. The number of blocks won by the company's main mining pool, MaraPool, also saw significant increases, with a 217% YoY and 40% MoM growth to 222 blocks in December. Marathon Digital’s transaction fee as a percentage of total revenue was 21.8% in December. Transaction fee revenue saw a 970 bps MoM increase. As we move into the halving event and block rewards get cut in half, transaction fees become a relatively more important part of a miner's earnings. Significantly higher transaction fees helped December’s Bitcoin production grow much faster than average operational hash rate. For the month, MaraPool collected more than 380 BTC in transaction fees or 22% of BTC production, up from 12% of production last month. Our success in capturing the sizable transaction fees currently available to miners is directly related to owning and operating our own pool and represents a key competitive advantage of our vertically integrated tech stack. - Marathon Digital press release Marathon's total cash, cash equivalents, and restricted cash increased by 217% YoY and 31% MoM to $356.8 million, with all of it being unrestricted. The company's total BTC holdings grew to 15,174, marking a 24% increase YoY and an 8% increase MoM. Marathon Digital’s current cash position is a lot of dry powder to venture into strategic facility and equipment acquisition and expansion pre- and post-halving. Marathon is targeting a 30% growth in energized hash rate in 2024. With the expected closing of acquiring two mining sites from Generate Capital this month, the company expects to reach 50 exahashes in the next 18 to 24 months. This growth in hash rate is likely to increase MARA's Bitcoin production capacity, which could positively impact future revenue and profitability, assuming stable or favorable Bitcoin prices and mining difficulty rates. Valuation MARA and Peers Price-to-Hash Ratio (TheMinerMag) MARA and most Bitcoin-related stocks have the inherent volatility that Bitcoin and cryptocurrencies possess; hence, they don't typically trade on traditional valuation. However, a comparison of MARA’s price-to-hash ratio to its peer average ratio shows some over-valuation. The average price-to-hash ratio of Bitcoin mining peers is 148.8x (derived by getting the average price-to-hash ratio of miners seen in the figure above). MARA currently holds the highest market share among Bitcoin mining companies, based on its share of BTC production relative to Bitcoin's total block rewards. This premium looks justified because of MARA’s large market share among public mining firms. MARA's higher market share, operational efficiency, and improved Bitcoin production numbers contribute to its perceived higher value. Risks The cryptocurrency market is characterized by rapid and sometimes unpredictable movements, making it challenging to predict price movements solely based on traditional valuation metrics. This presents an inherent risk for crypto mining stocks. Also, the unpredictable movements make revenue projections uncertain. When block rewards get cut in half in April, miners would rely more heavily on transaction fees and the appreciation of Bitcoin's market value to sustain their earnings. As post-halving revenue projections are uncertain, investors in crypto mining stocks should be prepared for increased price volatility. Takeaway The approval of spot Bitcoin ETFs could potentially lead to increased market liquidity, increased adoption, and a broader investor base for Bitcoin. This could lead to an overall higher network activity and demand for block space, and could indirectly influence Bitcoin network transaction fees. Also, as the BRC-20 ecosystem continues to grow, it will potentially bring higher fees to miners. As stated earlier, transaction fees become a relatively important part of a miner's earnings when block rewards get cut in half during halving. MARA is well-positioned to make the most of transaction fees post-halving because it owns and operates a self-mining pool. MaraPool represented more than 22% or about 380 BTC of MARA’s total Bitcoin production in December. This bodes well for MARA. Overall, Marathon Digital checks the necessary boxes (operational efficiency, powerful hash rate, transaction fee gains, and ample cash and Bitcoin reserve) to be a top gainer in the crypto space in 2024. Bitcoin’s current momentum, the upcoming halving, and the anticipated bullish year for Bitcoin, coupled with operational efficiency and sequentially improved numbers that Marathon has shown prompts a reconsideration of the stock’s rating, leading me to adjust the recommendation from "sell" to a "hold” stance. There is high risk, but there is also asymmetric upside potential.