Shares of Marathon Digital Holdings (NASDAQ:MARA) fell Tuesday after the cryptocurrency miner released financial results for 2020. The report showed very meager revenue, which seems to have caught investors off guard. By the time the market closed, Marathon Digital stock was down 11%.
Otherwise, it was a quiet day for cryptocurrencies, with the price of Bitcoin (CRYPTO:BTC) holding fairly steady. However, other cryptocurrency mining stocks like SOS Limited (NYSE:SOS), Bit Digital (NASDAQ:BTBT), and The9 (NASDAQ:NCTY) were all down sharply, falling between 7% and 13% for the session. My hunch is these stocks pulled back, in part, because of Marathon Digital.
For 2020, Marathon Digital generated $4.4 million in revenue. Much of this came in the fourth quarter, during which it generated $2.6 million. Anecdotally, I’ve seen some investors dumbstruck by these numbers. After all, Marathon Digital is one of the biggest bitcoin miners out there and the price of bitcoin has risen so much. How could revenue possibly be so low?
Remember, cryptocurrency miners like Marathon Digital only recognize revenue when selling bitcoin, not when it’s mined. Therefore, revenue alone doesn’t paint a completely accurate picture of business operations. For Marathon Digital, it mined 157 bitcoins in Q4. Assuming a price of $55,000, the company could have generated $8.6 million in revenue if it had sold them all.
Considering that Marathon Digital’s market capitalization was about $4 billion prior to today’s fall, it’s clear investors had expectations far exceeding business results. Although, the same could be said of most (if not all) cryptocurrency stocks these days.
For perspective, these companies can be compared with a metric called “hash rate.” Hash rate measures how powerful the mining hardware of the company is — think of it like how many picks and shovels a mining operation has. The more the better. According to Blockchain.com, the total hash rate of the bitcoin blockchain network is currently around 156 million terahashes per second (TH/s).
Marathon Digital’s hash rate is expected to be at 1.4 exahashes per second (EH/s) by the end of this month — equivalent to 1.4 million TH/s or 0.9% of the total hash rate. Bit Digital has over 2.2 EH/s. SOS’s new mining machines bring its capacity to 353 petahashes per second (PH/s) — one exahash equals 1,000 petahashes. For its part, The9 had 800 PH/s in February and just announced a deal to add 192 PH/s, taking its total to about 1 EH/s.
If you’re trying to keep up, Bit Digital claims to be the biggest of these four, followed by Marathon Digital, then The9, and finally SOS.
The point is, SOS and The9 are smaller operations than Marathon Digital. And Bit Digital isn’t that much bigger. Granted, the market caps of these stocks are much lower — around $600 million to $900 million. Some people may point out that they’re relative bargains to Marathon Digital stock. However, they’re still trading at quite a premium to their business results, and Marathon Digital’s financial report today is a reminder of that.
To top things off, Marathon Digital reported a net loss of $5.2 million for Q4 and a net loss of $10.4 million for 2020. It’s a reminder of how hard it is to profitably operate this business, even with bitcoin prices hitting record highs. The higher price of bitcoin attracts more and more miners to the pool, but the bitcoin payout doesn’t change. Therefore, companies have to keep increasing their hash rates just to maintain their bitcoin payouts, let alone increase them.
Marathon Digital intends to have 10.37 EH/s by the first quarter of 2022 — roughly 10 times the power it has now. But don’t think this will lead to revenue increasing at that rate. In reality, the other miners are doing the same. SOS, Bit Digital, and The9 are all actively increasing their hash rates. In fact, The9 hopes to have 8% to 10% of the total hash rate long term — that would be around 15 EH/s today. Therefore, there’s no end in sight to the announcements we should get from The9 and others going forward.
In other words, expect it to be very hard for cryptocurrency miners to maintain their current share of bitcoin mining. Nevertheless, they’ll spend heavily to keep increasing their hash rates.
And one final thought: The price of bitcoin is currently helping these businesses immensely, yet the financial picture still isn’t great. This is reason for concern considering the unpredictable nature of cryptocurrencies.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.