As much of a discount that Marathon Digital Holdings (NASDAQ:MARA) stock appears to be, investors should think very carefully before forking over their hard-earned money.
True, I’m not the arbiter of what happens next — no one is — but based on multiple pieces of evidence, the narrative at the moment for MARA stock is flawed.
That’s not to say that Marathon can’t make another comeback. Personally, I believe this will be the case. You shouldn’t interpret the above as an attempt to talk down MARA stock, nothing could be further from the truth.
In fact, in August of last year, I was one of the few folks that believed shares had upside appeal.
If you had invested in MARA stock at the time I mentioned it then, you would be looking at an 11-bagger. What’s more remarkable is that MARA shed nearly 46% since its peak close. Chalk this up to the profitability potential of getting in at the right time.
But at under $31, MARA stock — despite the discount — doesn’t make a whole lot of sense.
First, Marathon Digital is an enterprise cryptocurrency miner. Therefore, it depends on the viability of the crypto market. As I’ve been warning about, the crypto and token market do not look appealing in the nearer term. So, jumping on a blockchain miner is incredibly risky.
Second, crypto prices remain elevated even with the sharp correction that occurred around mid-May of this year.
Should valuations keep trending down, the economic incentive to mine cryptos exponentially declines. And that results in people exiting the space, as we saw in 2018.
Recall that MARA suffered huge losses back then, and the same could happen again.
Is China a Bailout for MARA Stock?
While I believe virtually everyone will acknowledge that the charts for cryptos looks ugly today, the counterargument is that this could be a temporary correction. Certainly, we’ve seen these fake-out moves before, and the sector has enough support for one last hurrah.
MARA stock in particular benefits from a geopolitical element.
Recently, InvestorPlace contributor Faisal Humayun pointed out that China banning crypto mining could be a boon for Marathon’s North American operations. With Chinese miners out of the picture, other miners can fill the gap.
Sure, Humayun notes that falling crypto valuations are a problem. However, if Marathon maintains its digital asset portfolio, the next rally could improve the company’s balance sheet liquidity profile.
While it’s an intriguing idea, I have some concerns. Number one, of course, there’s absolutely zero guarantee that cryptos will rally again. Don’t get me wrong , I think they will, but the sector could easily crumble into nothing.
Second, investors can be an impatient bunch. If too much of the balance sheet is levered to a volatile asset, they could seek more stable ground. Thus, it’s possible that even if the crypto sector’s underlying fundamentals are positive, MARA stock could decline on its own unique troubles.
Longer term, the Chinese government could be doing its nation a favor. That’s because many crypto-related operations consume an astounding amount of water for cooling purposes.
Thus, it’s not just about cryptos’ energy consumption for mining operations. Just to keep the lights on requires water.
Obviously, this is a huge dilemma in light of dwindling water resources in the U.S. In fact, National Geographic reported that in 2020, 40 out of 50 states expected water shortages.
Further, the southwestern region is on the precipice of a paradigm-shattering water crisis.
I’m not a big fan of China’s draconian communist governance, but it might have been onto something when it banned crypto mining.
Technical Posture Also Worrying
Before I get thrashed, please note that I didn’t say all crypto miners use water cooling. Even the facilities that don’t need to consume incredible amounts of energy to keep operating, though. You’re not going to get that from installing a few solar panels on the roof.
And yes, regular currencies such as physical coins require actual mining. This process consumes many resources as well, including water. But bringing up other operations that consume water and resources doesn’t exempt crypto miners from their consumptive profile.
On a final warning note, look at the technical posture of MARA stock. It appears that shares are printing a bearish head-and-shoulders pattern, with the head at the early April peak and the two shoulders being the Jan. 8 session and the present time.
If this is indeed the case, it really wouldn’t surprise me. The underlying crypto sector is weak. Miners are losing their incentive to keeping operating.
Marathon could suffer its own problems, and crypto mining could be too deleterious in many parts of the country. Unless you have strong conviction, I would stay away.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.