Marathon Digital Holdings Is Too Risky Despite Beijing’s Regulatory Tailwinds

Now is an opportune time to establish a position in Marathon Digital Holdings (NASDAQ:MARA) stock. Well, at least that’s what investors would conclude if they looked at the dynamics of Bitcoin (CCC:BTC-USD) mining at the moment.

SOS stock: Concept art of crypto mining with little figuring and a Bitcoin (BTC) token.
Source: Shutterstock

After all, Marathon Digital Holdings is a bitcoin mining firm and there is currently a massive opportunity due to China’s crackdown on the practice. 

But investing isn’t as simple as solely choosing the right industry. It is equally as important to choose the right firm. There are a few signals which indicate Marathon Digital Holdings may not be the right investment currently. 

Put succinctly, I’d state that there are better firms in the bitcoin mining space. However, MARA stock still has a chance to move upward due to Chinese regulation. Let’s start there. 

Chinese Crackdown

China has been a massive part of the bitcoin market for a long time. It accounted for over 65% of the decentralized network last year. That caused some concern regarding its influence over the cryptocurrency long before the April price collapse. 

So, when prices did collapse in April after hitting $63,000 and plummeting by 40%, China took action. Beijing, concerned with volatility and the effects on its economy, then increased its regulations. In May, the government went after bitcoin mining, with local governments across China pushing mining operations out of their respective jurisdictions. 

The crackdown on bitcoin mining in China has had a massive ripple effect on mining operations worldwide. 

In the wake of the crackdown the cryptocurrency became more affordable. That doesn’t directly help a firm like Marathon Digital Holdings. Its business model is to mine bitcoin and then sell it into the market when price dynamics favor it. 

But, the decrease in price did favor the company in another way. The hash rate declined markedly, making it much easier to do the business of mining itself. A CNBC report notes that more than 54% of bitcoin’s hash rate dropped off the network since Beijing’s intervention. The bitcoin code adjusted, and the net effect is that it’s 28% less difficult to mine as a result. 

And perhaps most importantly, bitcoin mining has become more profitable for miners. The overall thrust is that Marathon Digital Holdings and other bitcoin miners are experiencing boon times. 

And the company is not waiting around to improve its position.

To Buy or Not to Buy MARA Stock

Marathon Digital Holdings is certainly gearing up for a serious run at improving its fortunes. Another side effect of Beijing’s decision has been cheaper mining equipment. In early August the company contracted for the delivery of 30,000 additional Bitmain Antminer S19j Pro mining computers. 

The $120.7 million purchase means that the company paid just over $4,000 dollars per unit, much lower than the machines cost prior. 

The purchase will bring the company’s total fleet to over 133,000 Bitcoin miners, with the 30,000 new units delivered between January and June of 2022. 

It is a bold move by the company while being logical as well. No one can accurately predict what price dynamics will look like by delivery, but cheap equipment is cheap equipment. 

Generally, things look to be in place for the company to rise. Yet, the company’s recent earnings report really should give investors pause.

Financially Questionable

Investors should think twice despite the favorable landscape surrounding the company. That’s because there are some seriously concerning figures in its earnings report. 

The company recorded over $29 million in revenues in the second quarter. That represented a massive increase over the previous period in 2020. So, that’s undoubtedly a positive.

However, Marathon Digital Holdings also recorded a net loss well in excess of $108 million in Q2 of this year. That is difficult to accept if you’re a shareholder.   

Yes, the company could turn things around quickly given all of the positive tailwinds served up by China, but the fact is that a $108 million loss is a $108 million loss. For some the risk is worth it, but I wouldn’t recommend it.

On the date of publication, Alex Sirois 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 Publishing Guidelines.

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