spawns
The Bitcoin (BTC-USD) mining space offers a publicly traded leverage play on the commodity’s price movement. With a slew of Bitcoin spot ETFs potentially entering the marketplace post the SEC decision not to challenge a recent court ruling and the halving cycle rapidly approaching in April 2024, multiple bullish factors are driving the BTC price higher. The article below will discuss my view on why Marathon Digital Holdings, Inc. (NASDAQ:MARA) remains the best pure-play miner in the industry.
Bitcoin as a Commodity
Most are undoubtedly keenly aware of many of BTC’s attributes, and I would like to give a quick primer on some of the key characteristics as to why I believe it is best termed a commodity. The price of BTC has followed an orderly cycle where the block reward awarded to a miner is reduced by 50% (the halving cycle). The goal of the halving cycle is to reduce supply, which should drive prices higher over time, thus catalyzing the typical boom-bust cycle seen in the commodity space.
Marathon Digital
When analyzing the publicly traded Bitcoin miners, I zeroed in on a few key attributes that I believe are paramount to ensuring the business has a long runway of growth ahead of it. For the miners to outperform the underlying move in BTC, a dominant strategy in two areas is critical to drive the performance. The first element is a treasury policy to retain some of the BTC mined. Much like MicroStrategy Incorporated (MSTR), led by its visionary CEO Michael Saylor, who has successfully utilized a treasury strategy with strategic issuance of debt to acquire a large sum of BTC with ultra-cheap debt and profits from its legacy software business. If you are a believer in the asset, why would you be comfortable selling it at $35k at the time of composing this article, where if past history is a guide, a run well above 100% is probable 18 months post-halving if past historical trends continue to unfold? Is that 5% money market rate really that attractive?
The second element is the astute use of equity and debt to build out the mining infrastructure to capitalize on the opportunity. The industry remains highly fragmented, with the largest cost of the power utilized to run the miners. Often, the least expensive power is found in more remote locations, requiring the investment to build out the infrastructure.
I believe Marathon Digital is well-positioned as it easily passes these two criteria. Let’s examine each one in depth.
Bitcoin as a Treasury Asset
As of its recent investor presentation, MARA owns 13,726 BTC, a 5 percent increase from its holdings in August 2023. To add further context to these numbers, MARA mined 1,232 in September, or an average of 41.1 BTC per day. The average block reward is 6.25 coins, with 900 BTC on average issued per day. MARA accounts for over 4% of all BTC awarded in the month of September, a truly staggering amount. And yes, they did not retain all the BTC generated as they sold 800 coins to fund operations.
Let’s keep in mind the price of BTC was well south of $30k for the month of September. MARA’s cost base remains relatively stable, whereas if the price of BTC jumps, such as in the month of October 2023 (up over 20%), MARA will be able to retain a more significant percentage of BTC mined, thus growing the USD value of its treasury stock while paying less in BTC terms to produce another BTC. It is a genuinely fantastic feedback loop that should help increase the share price.
Astute Use of Debt
The astute use of its balance sheet to build out its mining rigs while avoiding the cost of building out the infrastructure sets MARA apart from its peers. MARA operates in the US, North Dakota, and Texas, the two most friendly mining states from BTC. Both have large swaths of trapped power, especially TX, that make them ideal to host BTC miners. The climate in TX is quite hot in the summer, affecting hash rates as the state regulator, ERCOT, will require power curtailment.
MARA has partnered with Abu Dhabi for an immersion cooling site where MARA is responsible for 20 percent of the cost and shares a proportional amount of the bitcoin earned. An immersion cooling plant operates a bit differently than a traditional mining site where the rigs are submerged in a gel that “cools” the system, thus allowing for lower power consumption due to removing the cooling fans generally on the system.
Risks to the Thesis
If our base case is BTC will exceed its all-time high (roughly double its current price at the time of publication), what can be a reasonable expectation for the move in MARA? Assuming a treasury holding of 14k BTC at $70k gives us a value of 980 million plus the value of the mining operation. MARA would be producing at least 21 coins per day post halving at $70k per coin, nets them a rate of $1.47 million per day, which annualizes to a revenue rate of $500 million per year. I am using a $30 per share price target, which works out to over 2x its current price. Naturally, if the price of BTC exceeds $70k and or MARA produces more BTC per day, the math becomes more favorable. For those who wish to diversify their holdings in miners, kindly review my recent analysis of a Miner ETF.
Understanding mining dynamics and the risks involved is also essential to take a more balanced view of the opportunity. The availability of cheap power is not a given, and curtailments due to inclement weather will impede production. A widespread fire or loss of use will affect production. There is no guarantee the price of BTC will exceed its old high, rendering the favorable outlook for MARA null and void. An investment in MARA should be viewed as a speculation with the potential for catastrophic loss. Good luck to all!!!
