Marathon Digital: Bitcoin's Bears Could Still Win

Summary Marathon Digital has started off 2023 with a material rally as Bitcoin sentiment recovers on the back of falling inflation. The miner produced a record 687 Bitcoins in January, a 45% increase from the prior month. Total unrestricted Bitcoin holdings as of the end of the month stood at 8,090. Marathon Digital ( MARA ) is up over 100% year-to-date as the 2023 stock market fully sheds concerns about the prior year's high-profile exchange failures. In my opinion, the sentiment is clear, the Bitcoin (BTC-USD) winter is thawing and its institutional infrastructure from miners to exchanges and banks all now stand to reverse more than a year-long decline in their commons. Data by YCharts The surge has come on the back of what remains an almost 44% short interest in Marathon. Whilst some of Bitcoin's use cases face headwinds, the bears face material risks here. The current surge could be extended especially as the positive macroeconomic news that catalyzed the present rally was driven by positive inflation figures. This has set the backdrop for an end of the current Fed funds rate hike cycle and has come together with a heightened potential of a soft landing. What The Bulls Should Be Concerned About Marathon acts as a proxy for a direct Bitcoin investment and has been buoyed by the enthusiasm building around a near-term end to rising Fed funds rate. It's likely there will be two further 25 basis point hikes to close out its chapter. Marathon tracks Bitcoin which in turn moves in parallel with the tech-heavy Nasdaq 100 index ( QQQ ). Data by YCharts To be clear, Marathon's recent outperformance has not been built on an improvement in the underlying fundamentals of the cryptocurrency but on broader macroeconomic conditions that have placed the company on the same path as more traditional tech stocks. Why do I think this is concerning? A pertinent argument put out by Bitcoin maximalists was that the digital asset presents a hard break away from financial orthodoxy and a hedge against inflation. Data by YCharts But Bitcoin has acted proportional to inflation over the last year with the asset dropping when a flight of capital away from stocks and bonds to crypto was meant to take place to reflect the dominant crypto narrative. That this didn't happen significantly limits the use case for Bitcoin and its relevant investment proxies like Marathon in my opinion. It adds legs to bearish arguments that Bitcoin is mainly a speculative asset whose previously insatiable animal spirits now look to be returning on the back of an end to the current Fed rate hike cycle. Marathon recently released its January Bitcoin mining update. The company produced 687 Bitcoins , a 45% increase over the prior month and a record number of Bitcoin produced in a single month. This total mined is roughly currently valued at over $15 million and sets the company up for a decent recovery for its fiscal 2023 first quarter if currently elevated prices are sustained. Cash as at the end of the month stood at $133.8 million with Marathon's balance sheet further buoyed by unrestricted Bitcoin holdings increasing to 8,090. Why 2023 Offers More Uncertainty The current bearish rally could eventually get divorced from the improving fundamentals of the US economy to reflect what remains a collapsing crypto ecosystem now facing material headwinds to mainstream adoption and whose catalysts have been increasingly placed ever beyond the horizon. The most recent setback was the SEC rejecting the second application by ARK 21Shares for a spot Bitcoin ETF. The ETF would have been partially managed by Cathie Wood’s ARK Invest and comes on the back of ongoing litigation being brought by Digital Currency Group's Grayscale Bitcoin Trust ( BTC )" target="_blank">GBTC ) to convert to a spot bitcoin ETF. The continued failure of attempts to create a spot Bitcoin ETF reflects the barriers Bitcoin will continue to face to broader adoption. With the direction of Bitcoin now being driven by broader economic factors, 2023 will bring uncertainty in response to the monthly drops of macroeconomic figures that communicate whether or not the Fed funds rates can stop their ascent. A return of animal spirits now lingers in anticipation of a dovish pivot by the Fed as the US economy looks set to grow this year, avoiding previous forecasts for a recession. Hence, even as we see an increasingly aggressive SEC take an aggressive stance against Bitcoin, the digital asset could still come out on top. Fundamentally, the bears could still win if inflation remains elevated for longer than the current rally expects. This would force the Fed to institute more hikes and maintain the rates at higher levels for longer. Whilst I don't think 2023 will bring a return to Bitcoin's pandemic-era highs, the bulls are currently ahead with the asset and the broader stock market now amidst a bull run. Bitcoin is still down versus its year-ago comp so results for Marathon's fiscal 2023 first quarter will be poor, albeit a material improvement from fiscal 2022 fourth quarter earnings. I expect this will see Marathon report a record net loss and a significant impairment charge. I'm now neutral on the stock.