Undoubtedly, one of the top investment sectors over the last six months is cryptocurrencies. As I write these words, Bitcoin (CCC:BTC-USD) is trading just under the $60,000 level. But because of the law of large numbers, the potential for outsized gains is instead found in crypto-mining specialists, such as Marathon Digital Holdings (NASDAQ:MARA). You only need to glance at the charts for MARA stock to understand the speculative appeal.
Of course, the main obstacle for Marathon and similar investments is that they’re dependent on the health of the virtual currency complex. While it’s possible that MARA stock could rise higher even if cryptocurrencies fade, I believe it’s unlikely. As the last boom-bust cycle demonstrated, volatility in the mining space can be both rapid and brutal.
Still, even with the elevated price of MARA stock, many investors are still willing to bid it up. Largely, this is due to the resilience of Bitcoin and other major blockchain tokens. Despite recent choppy trading, they haven’t fallen off a cliff like some bears feared. Instead, they appear poised for another record-breaking run.
Adding to the optimism are broader fears of inflation. Recently, CNBC published an article reporting that manufacturing “expanded at the fastest pace since December 1983.” In turn, this data suggests that inflation could rise in the months ahead.
Bolstering this argument is the ADP National Employment Report. In March, the economy added 517,000 nonfarm jobs between February and March, suggesting that the jobs report by the U.S. Bureau of Labor Statistics will likewise post strong numbers.
Obviously, more jobs equal more people with discretionary income, boosting dollar supply. In other words, more dollars are chasing fewer goods, which should foster an inflationary environment. That’s great news for cryptocurrencies because they can act as a hedge against inflation.
Watch Inflation Deception for MARA Stock
The dependency problem mentioned above for MARA stock isn’t really an issue during a bull market. If demand rises for crypto tokens, miners will profit from their supply-stoking activities. Again, because of Bitcoin’s resiliency, Marathon shares are in the game despite looking rather stretched.
However, I fear that the inflation argument is more hype than reality. For instance, if you look at the details of the ADP report, you’ll notice that it contradicts the CNBC report above. Of the 517,000 jobs added in March, the lion’s share (specifically 84.5%) came from the service-providing sector. Thus, only 80,000 jobs came from the goods-producing sector.
Don’t get me wrong — this is still a solid figure considering the circumstances. But when manufacturing alone only accounts for less than 10% of the total job growth in March, I’m not sure that warrants an inflation spike from a supposed “manufacturing boom.” Put another way, the details underneath the attention-grabbing headlines don’t support the inflation narrative, which isn’t necessarily helpful for MARA stock.
Also, look at who’s doing the hiring. From the ADP report, large businesses contributed the least to March job growth (30%). Instead, small and medium-sized businesses did most of the hiring, which makes sense. As restaurants, movie theaters, hotels and other service-related companies reopen to the public, they need to hire workers. Typically, these are low-income occupations.
For large businesses, firms in this sector overwhelmingly supported work-from-home initiatives. They also received large chunks of relief loans from the federal government. Therefore, big business benefited tremendously (perhaps the most relative to smaller companies) from bailouts, lower overhead and in many cases, automation.
Yet this sector did the least hiring. Guess what, folks? That’s deflationary! Yes, even the employment numbers — when you drill into the details — scream deflation, not inflation.
Leave Some Room for Crazy
One of the most-cited retorts against excessive speculation is that eventually, the fundamentals will matter. But the question of the day is, do the fundamentals matter now for MARA stock and the underlying cryptocurrency complex? I’m not sure.
If you want my opinion, I think the crypto market is getting way ahead of itself, especially with deflationary pressures being the dominant force in the economy. For additional confirmation, look at the precious metals sector. If inflation was imminent, you’d think that the smart money would pile into safe-haven assets. They’re not.
Nevertheless, I saw enough crazy over the past few months to know that you can’t take anything off the table. Therefore, in order to conservatively navigate these treacherous waters, I’ve “spiritually” straddled my crypto holdings with a short position in MARA stock while leaving many of my crypto coins untouched.
No, I don’t hate Marathon Digital Holdings. But given the extreme boom-bust cycle of digital assets, I’m doing what I need to do to protect myself.
On the date of publication, Josh Enomoto held a short position on MARA and a long position on BTC.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.