George Soros's Q4 Activity Revives Investor Interest In Marathon Digital

1 year ago

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Marathon Digital Holdings, Inc. (NASDAQ:MARA) banal surged connected February 14 arsenic Soros Fund Management led by billionaire investor George Soros revealed an finance of $8,984,659 successful convertible notes of nan institution that could beryllium converted into 39,600,000 communal shares. Not surprisingly, Mr. Market welcomed this news, fixed that George Soros has built a estimation for exploiting mispriced bets successful superior markets. Cryptocurrencies person started 2023 connected nan correct ft - astatine slightest from a marketplace capacity position - pinch Bitcoin (BTC-USD) prices up much than 33% YTD. MARA's tally continued yesterday too, pinch nan banal ending nan time up much than 18%. This study intends to shed ray connected nan company's profitability profile, equilibrium expanse health, and nan changing competitory landscape.

Months Or Decades Away From Profitability

If nan supra subheading confused you, that was precisely what I was looking for. The superior driver of a Bitcoin miner's profitability is nan underlying Bitcoin prices, which makes Bitcoin mining operations akin to mining assets specified arsenic golden and silver. Bitcoin prices are highly volatile and predicting early prices is adjacent to intolerable though immoderate analysts person travel up pinch value targets that cannot beryllium rationally justified utilizing math. Because of nan precocious volatility of Bitcoin prices, it is difficult to foretell erstwhile Marathon Digital will move a profit. Investors, however, request to see a fewer different factors successful summation to Bitcoin prices to find nan imaginable profitability of nan company.

The costs of electricity.
The value of Bitcoin mining equipment.
The title successful nan industry.

Using Q3 data, Marathon Digital will breakeven astatine a Bitcoin value of $16,646 from a costs of mining gross perspective, but arsenic illustrated below, Bitcoin prices will person to emergence astronomically for nan institution to breakeven from an operating profit perspective.

Exhibit 1: Breakeven Bitcoin prices for nationalist miners arsenic of Q3 2022

Because Bitcoin prices are highly volatile, Marathon Digital mightiness extremity up pinch profits arsenic soon arsenic conscionable a fewer months if Bitcoin takes off, but nan other is besides true. One of nan main points raised by bulls is that Marathon Digital's hash complaint will turn exponentially aided by nan company's investments successful miners. In its latest investor presentation, Marathon Digital highlighted really its hash complaint could swell to 23 EH/s by mid-2023 from conscionable 3.8 EH/s reported successful Q3 2022.

Exhibit 2: Projected hash complaint growth

These projections look rosy but to adhd immoderate context, nan institution initially guided for 13.3 EH/s by Q2 2022, a target that Marathon Digital grounded to accomplish. As a growth-oriented investor, I americium consenting to return calculated risks to hit nan marketplace successful nan agelong word but I judge investors request to beryllium cautious astir investing successful a Bitcoin miner solely based connected hash complaint maturation projections.

Leverage Is A Concern

Marathon Digital raised adjacent to $750 cardinal successful a convertible statement offering successful Q4 2021, and nan institution utilized nan mostly of these proceeds to acquisition Bitcoin mining instrumentality aggressively. In December 2021, nan institution struck a deal pinch Bitmain to acquisition 78,000 Bitcoin miners for a staggering $879 million. According to nan acquisition statement revenge pinch nan SEC, Marathon Digital agreed to salary complete $11,000 per portion for Bitmain S19 machines.

Exhibit 3: Delivery schedule and value specifications arsenic per nan acquisition statement pinch Bitmain

The institution entered a non-fixed value woody pinch Bitmain and nether nan costs terms, Marathon Digital agreed to salary 35% of a batch's value astatine slightest 6 months earlier shipment. Since Marathon struck this deal, prices of Bitcoin mining instrumentality person plummeted.

Exhibit 4: Bitcoin ASIC value index

The supra prices are calculated based connected portion prices and their hash complaint output, and successful summary, portion prices person fallen much than 85% from nan highs seen successful 2021. The company's determination to acquisition mining instrumentality astatine elevated prices mightiness travel backmost to haunt investors successful nan coming years pinch its convertible indebtedness maturing successful December 2026.

In summation to nan convertible debt, nan institution has secured 2 different in installments facilities; a $100 cardinal word indebtedness and a $100 cardinal revolving in installments facility. Both these loans require nan institution to support Bitcoin arsenic collateral astatine nan clip of drafting from these facilities. In Q3, Marathon Digital utilized $50 cardinal from nan word indebtedness astatine a costs of astir 9% (prime complaint positive 1.75%) and utilized $50 cardinal from its revolving in installments installation arsenic well. The institution had to usage 9,490 Bitcoin arsenic collateral for these loans. Investors, pinch this knowing of Marathon's superior structure, request to make nan basal adjustments to cipher nan unrestricted liquidity of nan institution astatine immoderate fixed clip without utilizing nan full Bitcoin holding arsenic a proxy for unrestricted liquidity.

In general, investing successful a highly leveraged Bitcoin miner seems inherently riskier than investing successful Bitcoin itself arsenic companies could spell bankrupt amid liquidity issues. In contrast, nonstop Bitcoin investors are not exposed to this risk.

Short-Term Volatility Is On The Cards

Marathon Digital banal has much than doubled this twelvemonth (+133%) aided by rising Bitcoin prices and a notable betterment successful investor sentiment resulting from George Soros's relation pinch nan company. Another imaginable logic down nan caller gains is nan rising liking successful MARA among traders looking for imaginable short-squeeze opportunities. The Reddit "Shortsqueeze" organization pinch 161,000 members has been actively discussing nan outlook for MARA banal arsenic a one-of-a-kind short compression opportunity, and these discussions person led to a renewed liking successful nan institution among traders.

Competitive Landscape May Improve

Some Bitcoin mining companies person travel nether unit pinch caller macroeconomic challenges, forcing them to spell retired of business. Core Scientific, Inc. (OTCPK:CORZQ), 1 of nan largest crypto mining companies successful nan U.S., filed for bankruptcy protection successful December, triggering wide investor fears for nan early of its rivals. For Marathon Digital, these bankruptcies whitethorn travel arsenic a blessing successful disguise arsenic a imaginable diminution successful hash rates will let nan institution to make much bang for nan subordinate pinch reduced competition.

Takeaway

Marathon Digital, 1 of nan largest nationalist Bitcoin miners successful nan U.S., is investing aggressively to bring much mining rigs online. This strategy will thief nan institution excavation much Bitcoin successful nan coming quarters, thereby relieving immoderate unit connected its liquidity floor plan pinch nan institution now starting to waste Bitcoin to money its business operations. Despite immoderate affirmative developments, arsenic a long-term-oriented investor, I do not consciousness comfortable taking a position successful MARA fixed that investing successful Bitcoin straight seems a amended action if I were to put successful cryptocurrencies.

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