Marathon Patent Group (NASDAQ:MARA)has climbed nearly 200% in 2021. And going back to Dec. 2020, MARA stock is up approximately 400%. The reason for the mania surrounding this crytocurrency mining stock is Bitcoin (CCC:BTC:USD) which is up nearly 150% in the last three months.
Another catalyst for Marathon is that it purchased $150 million worth of Bitcoin in January in an attempt to make MARA stock a pure-play Bitcoin investment option. However at its core, Marathon Patent Group is a Bitcoin miner. And Bitcoin mining is a capital intensive, low-margin business. With that in mind, I’m wondering what a winning strategy looks like for Marathon Patent Group.
What Happens If the Bubble Bursts?
I’m not sure what constitutes a bubble anymore. All I know is that nothing goes up forever. At some point, things are going to get pretty nasty for the stock market.
But if stocks suffer a major correction or even a crash, would that be bullish or bearish for cryptocurrencies? The answer seems to be that nobody knows for sure. A major correction of the market would negatively affect liquidity and investors’ confidence.
And if investors are forced to liquidate assets to meet various obligations, it’s easy to believe that cryptocurrencies would also sell off. Then, rather than look at Bitcoin as a port in the storm, they may see it as a deck chair on the Titanic.
On the other hand, in a bear market some asset classes rise while others fall. But nobody quite knows how to define Bitcoin. By traditional metrics, it’s not a fiat currency and it’s not a commodity.
Bitcoin Has Never Faced a Bear Market
Since Bitcoin came into existence in 2009, stocks have never experienced a real bear market.
It may be accurate to say that Bitcoin was born in a bear market. However January 2009 was the tail end of the 17-month bear market, so I am convinced that the cryptocurrency has never been traded during a bear market. As a result, we don’t know how Bitcoin will react to a bear market.
Could MARA Stock Face a Lose-Lose Scenario?
If Bitcoin continues its ascent, that would appear to be be great news for MARA stock, since the chart of MARA stock has a strong correlation with that of Bitcoin. However, the profitability of cryptocurrency miners is affected by the hash rate, which defines the ease of mining a Bitcoin. When the hash rate rises, each coin becomes more valuable, causing competition in the sector to rise.
And higher hash rates also lowers miners’ margins, which are already thin. Right now, companies like Marathon seem willing to increase their debt even though their margins remain very tight.
However even if Bitcoin climbs, at some point Marathon will have to buy more equipment, lowering the value of MARA stock. At that time, Marathon will also likely sell some of the $150 million of Bitcoin that it purchased in January.
In that scenario, MARA stock is likely to lose momentum either quickly or more slowly.
Speculate at Your Own Risk
If you’re betting on Bitcoin in the short term, then taking a shot at MARA stock makes some sense. However, it seems that at some point over the long-term, the cost of becoming the best will outweigh the company’s gains, from the point of view of shareholders.
I have to wonder if the company’s business model would excite investors at all if it wasn’t related to Bitcoin.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.