Marathon Digital: A Fee Market, If You Can Keep It

Summary Marathon Digital's stock performance has been phenomenal this year, with only Bitfarms having a better YTD return among mining tickers. Bitcoin transaction fees have seen a significant increase in December, potentially indicating a new trend and making bitcoin mining more viable long term. Despite debt and the looming halving, Marathon Digital has the largest BTC stack in the industry and is well-positioned to benefit from higher BTC prices and transaction fees. It has been eight months since I last covered Marathon Digital (MARA) for Seeking Alpha. While the Bitcoin ( BTC-USD ) mining sector is an area where I've had quite a bit of focus over the last year, MARA is not a stock that I've covered with a great deal of frequency in the past: Marathon Digital: Bitcoin Miner Investors Should Look Elsewhere Marathon Digital: Has The Storm Been Weathered? Marathon has the largest market capitalization in the industry and therefore gets a fair amount of coverage compared to the smaller market cap companies that I generally favor. I've also felt that the vertically integrated approach is the better one during times of market stress. All this said, I flipped my view on MARA shares from "sell" to "hold" in April and left readers with this thought in the final summary: There are several BTC miners that have healthier balance sheets. But there are very few that have the combination of BTC stack and the production capacity that Marathon has. Capacity that the company is continuing to scale through the remainder of 2023. If you're looking for a simple Bitcoin proxy bet that will move up when Bitcoin moves up, MARA should do the trick and possibly to a larger degree than other mining companies that lack the ability to meaningfully scale BTC holdings before the halving. I feel as though all of that is still true today and we can observe the year to date performances of MARA and industry peers to assess which names the bulls have gravitated toward since the depths of "crypto winter." BTC Miners Performance (Seeking Alpha) There is no question Marathon Digital's stock performance has been phenomenal this year. Of the roughly two dozen mining tickers I follow, only Bitfarms (BITF) has a better YTD return than MARA. The Transaction Fee Market Shortly following my last MARA article, bitcoin miners enjoyed a large spike in transaction fees that fizzled out by July. This fee spike was attributable to the Ordinals protocol and BRC-20 token swaps. During most of the summer and fall months, fees generally normalized and fell back to 2 to 4% of block reward revenue for miners. BTC fee % of Total Block Reward (HashrateIndex) However, fees from mining Bitcoin are having a moment again. On Sunday, December 17th alone, miners earned 550 BTC from fees. This is an addition to the normal block reward emission, which has been around 900 BTC per day. Adding the 560 BTC from Saturday, December 16th, miners earned more BTC from transaction fees over a single December weekend than they did during the entirety of almost every individual month this year with the exceptions of May, June, and November. Miner Fees by Month (BTC) (Author Chart, via IntoTheBlock data) But even with two weeks still remaining in December from the time of article submission, December transaction fee revenue has already taken out November's total of just under 3,875 BTC. Up until Q4, the May fee market looked as though it was a flash in the pan. But November and December look more like the start of a trend, in my opinion. In fact, December is already the second largest grossing month for Bitcoin transaction fees in 2023 and we're only through December 17th. There is absolutely no doubt in my mind at this point that December will take out May's total of 4,538 BTC from transaction fees. BTC Transaction Fees (IntoTheBlock) Looking at this with more history for context, we can see sustained moves higher in BTC transaction fees during both the 2017 and 2021 BTC price rallies. If we are indeed at the beginning of another BTC post-halving price run, it is somewhat reasonable to assume the transaction fee market can remain more robust than it was during 2022 and most of 2023. Other Considerations I actually don't believe there is a one size fits all standard for valuing these companies in the mining space due to the varying models within the industry. For instance, I don't judge a company like Iris Energy (IREN) and Marathon with the same metrics because they are completely different businesses at this point in time. One sells production each month, while the other has a 14k BTC treasury stack: Ticker BTC Treasury Total HODL Value Market Cap Treasury/MC Marathon Digital 14,025 $577m $4.1b 13.8% Hut 8 ( HUT ) 9,129 $376m $1b 37.3% Riot Platforms ( RIOT ) 7,358 $303m $3.3b 9.3% CleanSpark ( CLSK ) 2,575 $106m $2b 5.4% HIVE Digital ( HIVE ) 1627 $68m $443m 15.3% Sources: company filings, Seeking Alpha, author's calculations If one is optimizing for production efficiency, there are miners that are better than Marathon Digital. If one wants the largest BTC stack as a percentage of market cap, Hut 8 might be the better option, but it comes with debt baggage post-merger. MARA would be somewhere in the middle with a 14% treasury to MC ratio. BTC Miners LT Debt to Total Capital (Seeking Alpha) Marathon Digital's long term debt to total capital is one of the higher figures in the industry at 24.2%, but given the company's enormous 19+ EH/s production, MARA is well positioned to benefit from higher BTC prices and/or transaction fees if they remain sticky. And in my view, it's important that they do remain sticky because a robust fee market makes the economics of bitcoin mining more viable long term: Q4-22 Q1-23 Q2-23 Q3-23 TTM Cost of Revenues $29,700,000 $33,400,000 $55,200,000 $59,600,000 $191,700,000 Total Opex $66,000,000 $21,600,000 $42,800,000 $53,900,000 $228,900,000 BTC Mined 1,562 2,195 2,926 3,490 10,789 Breakeven Price $61,268 $25,057 $33,493 $32,521 $38,984 Sources: Seeking Alpha, company filings, author's calculation In the table above, I'm showing an estimated "breakeven price" for Marathon. It seems every time I share this metric in Seeking Alpha articles, there is confusion in the comments section about what it means. To be clear, the electricity costs shared with investors by the companies in this industry and the breakeven price estimated above are not the same thing. The breakeven estimate that I'm showing above is the cost of revenue combined with total opex and divided by the BTC mined in the quarter. Looking at the long term trend in this figure can be helpful in my opinion. While it's certainly not the lowest number we've seen, at $39k trailing twelve months, Marathon should be profitable at current BTC prices if Q4 expenses are comparable to last quarter. And this doesn't include any revenue boost from transactions fees in November and December. But this table is important to understand. Because without a sustainable fee market, MARA and every other public bitcoin miner, will primarily serve as highly speculative, cyclical stocks that need to be properly timed. Without fees, the breakeven price in that table is going to double. And while Bitcoin could absolutely get to $80k post-halving with the central bank seemingly pivoting in 2024, it's far from a certainty. Risks MARA is up over 400% since the beginning of the year. In my view, investors should be cognizant of possible profit taking here in the short term as we approach the end of the year. Beyond that, Bitcoin itself has generally been overbought in recent weeks and may be due for a sizeable pullback under $40k per coin. In that event, MARA shares will likely decline as well. Data by YCharts Finally, mining stocks are not great long term investments given the current models. The block reward is cut in half every four yours by design. Without higher coin prices in perpetuity and/or a sustained move toward transaction fees as a larger percent of miner revenue, the business model for these companies is flawed. While it is very exciting seeing the transaction fees starting to become a meaningful portion of miner revenue, it is important to keep in mind that there are some in the Bitcoin community who would rather see the network usage that is generating those fees removed from block space . That is a very significant potential problem, and there are possible ramifications beyond the scope of this article if Ordinals are filtered out of transactions. Summary I'm actually coming around on Marathon Digital. Given the production capacity and the BTC on the balance sheet, I don't think there is a public miner that benefits more from higher Bitcoin prices than MARA does. It's not the most efficient producer, but it has the largest stack in the industry and the biggest production figures. Dilution has clearly been a major concern as the company has operated at huge negative net income figures over the last two years. Data by YCharts Global hashrate has continued to climb through the depths of crypto winter. However, I suspect we may see some of the weaker players in the industry exit after the halving in April. I see that as a possible opportunity for Marathon as the company could conceivably see share of network rewards increase post-halving if BTC prices don't make a new all-time high shortly after. All this said, one could very easily argue it makes more sense to just buy Bitcoin directly or Grayscale Bitcoin Trust (GBTC) at a discount if you believe BTC's price will continue to increase. I empathize with those opinions and would caution MARA holders to consider the cyclical history of these stocks as well as the stickiness of transaction fees going forward. If miners are only generating revenue from new BTC emissions, buying mining stocks is a dangerous game to play if you're a novice investor or trader. But in closing, I think there is a strong fundamental setup for Bitcoin and I think the companies that have both exposure to BTC and BTC-denominated revenue streams will outperform the broad market next year. MARA is the giant in the space. I'm not betting against it.