Marathon Patent Group (NASDAQ:MARA) stock has skyrocketed this summer, right alongside renewed interest in bitcoin. With cryptocurrencies back in the spotlight, shares of this money-losing bitcoin-mining company have risen over 1,000% from 35 cents in April to over $4. There’s just one massive problem: its business of cryptocurrency mining doesn’t make money.

Instead, the company’s flawed business model translates into a $3-$5 loss for every $1 of bitcoin mined. It’s one thing for the ship to steer off course. But it’s another thing for the captain to be asleep at the wheel. And frankly, I’m not sure Marathon’s management realizes the trouble they’re in.

Put another way, Marathon’s stock will only go up only if bitcoin prices rise.

So rather than sink your money with a company that awarded its CEO $1.2 million last year, it’s better to look for opportunities elsewhere. Even if you believe bitcoin prices will keep going up,  you’re far better off buying bitcoin options than rolling the dice with this former patent troll.

A Great Industry Doesn’t Guarantee Success

I’ve written before on the fantastic potential of blockchain technology. And every long-term investor knows that great technological leaps create opportunities for massive investment gains. Early investors in Amazon.com (NASDAQ:AMZN) would have seen their initial investment grow over 180,000%.

But just because you’re in a great industry doesn’t mean you’re guaranteed to win.

MARA Stock Has a Business Model Problem

Every cryptocurrency investor understands that mining is a tough business. There’s a good reason why venture-capital (VC) backed cryptocurrency companies focus on developing new technologies and software, rather than the capital-intensive hardware side. Well, there are actually three reasons:

Firstly, miners need enormous cash outlays to buy mining equipment; a new ASIC miner can cost $2,500 each. And wait times can reach many months for the newest models. That means most mining companies run into cash issues — they’re forced to borrow to buy miners today but don’t generate income until months later. (It’s the same reason why automotive and airline companies tend to go bankrupt in downturns.)

Secondly, bitcoin mining costs a lot of power to run. The newest generation of mainstream mining rigs uses 3,250 watts of power per unit, the equivalent of running three toaster ovens 24/7. And this adds up fast. Today, for every $1 of bitcoin mined, around 75 cents go toward power costs.

Thirdly, bitcoin miners have limited lifespans. Bitcoin’s mining difficulty rises over time, which means top-of-the-line miners typically become outdated every two years and get replaced by newer models. Even those that survive technological oblivion tend to physically fail after three years. That’s what happens when you run a computer at 100% capacity non-stop.

That means the typical bitcoin miner never reaches profitability. With 8 cents/kw power costs, the average high-end SHA-256 miner nets only $5.40 per day when brand-new, according to ASIC Miner Value. Profits then steadily decline as the machine ages, dropping to zero after around 26 months. That’s $2,141 of gross profit ($5.40 / 2 * 800 days) before deducting air-conditioning costs, repairs and rent.

And how much did that average high-end miner initially cost? Around $2,400 or more. Mathematically, the business doesn’t make much sense.

Marathon Has Failed to Grasp Profit-Loss Lessons

Yet, Marathon Patent Group hasn’t seemed to learn. In February 2018, the company bought 1,400 S-9 Bitmain Miners for $3,255 apiece (plus an additional $500 each to install). Despite the S-9’s sinking profitability, the company purchased another 6,000 units in September 2019, paying the buyers with an astonishing 20% of outstanding stock in MARA.

Today, the S-9 units won’t even cover their power costs. You can buy them used on Alibaba for under $18 each.

So did MARA ever make a profit from the S-9? It doesn’t look like it to me. For every $1 of bitcoin mined in 2019, the miner generated $4.58 in operating expenses, causing a $3.3 million loss.

But that hasn’t stopped Marathon’s management team from pushing forward. On Friday, the company announced it would buy another 10,500 Bitmain miners (the newer S-19 model) for $2,190 apiece. The company has a current wait time of around five months for its latest 500 miners, so the 3-month old miners will probably be at least 8 months old by the time the company starts receiving them.

Even now, the S-19s are only profitable at $8,430 bitcoin, a number that will worsen as mining difficulty increases.

Marathon’s Questionable Accounts

If that wasn’t enough, Marathon has several financial red flags. Its previous auditor, BDO, abruptly resigned without reason in late-2017. Management replaced the company with RBSM, a far smaller auditor with only one relatively junior CPA in the state.

And long-term shareholders have repeatedly lost from MARA’s financial shenanigans. In 2017, the company wiped out 81% of existing stock holders in MARA when they bought bitcoin mining equipment from a company that analysts suspect was owned by the company’s former CFO. The company then diluted shareholders another 20% in their 2019 acquisition of another 6,000 miners, and another 23% in July 2020 when they issued another 7.7 million shares. Because the company is so unprofitable, it’s forced to keep diluting shareholders simply to maintain its current bitcoin production levels.

Can Marathon Patent Group Win? Possibly …

The company’s power and hardware costs are fixed, and so is their production of raw bitcoin. If bitcoin prices go up, Marathon can convert the fixed amount of bitcoin they mine into huger wads of cash. Also, ASIC miners might eventually reach their upper-performance limit, so their lifespan may extend from two years to three. Finally, the company could find cheaper sources of power than 8 cents per kilowatt-hour, the average for their mining location in Nebraska.

… But Don’t Hold Your Breath

But why invest in a money-losing company with so many red flags? Marathon essentially just buys the latest Antminer rigs (which you or I can easily do) and runs them until they’re no longer profitable. There’s little differentiation to their process, and basically zero barriers to entry. In other words, mining cryptocurrency quickly becomes a race to the bottom for finding the cheapest kit and energy.

So if you’re a fan of blockchain technology, avoid Marathon at all costs. Instead, invest in blockchain companies that create REAL technological innovations. That’s where you’ll find amazing long-term returns.

Or just buy bitcoin or options directly. That’s a far cheaper way to profit from a rise in bitcoin prices.

Just don’t get stuck buying stock in MARA. Even if it’s the right industry, it’s NOT the right business for the thoughtful investor.

On the date of publication, Thomas Yeung did not hold a position (either directly or indirectly) in any of the securities or cryptocurrencies mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.