Marathon Digital Holdings (NASDAQ:MARA) is a stock that is absolutely on fire. In 2021 MARA stock has jumped over 300%. That return vastly outpaces the market and has rightly invited investor interest in this name.
That sort of optimism is to be expected towards any company in the cryptocurrency mining game. Indeed, Marathon is one of the fastest growing Bitcoin (CCC:BTC-USD) miners in the world. Accordingly, those speculating on cryptocurrencies have quickly looked to the miners as potential behind-the-scenes winners from this mania.
Here are some details on why investors are going bonkers over MARA stock right now.
Marathon Is the Future of Bitcoin Mining
The blockchain underpinning Bitcoin is one which requires Bitcoin miners to verify, transaction blocks by chaining them together. Miners like Marathon play an integral role in sustaining the blockchain for Bitcoin and provide an essential service in some ways.
Investors in MARA stock are getting a stake in the company’s infrastructure and mining capabilities. The average person is incapable of mining Bitcoin, mainly due to the power needed to run highly specialized machines that are extremely expensive. To validate the blockchain, these machines run complex computations. Miners are rewarded by given Bitcoin as well as transaction fees for the work they provide.
Thus, companies like Marathon have benefited greatly as Bitcoin prices rise. Marathon has also intrigued investors due to the company’s aggressive growth strategy.
Marathon’s goal is to operate over 100,000 mining machines by the end of 2022. Currently, the company operates a little more than 2,500 such machines. This exponential growth in mining capacity, along with today’s high Bitcoin prices, has resulted in a massive upward revaluation of this stock.
At 2022 capacity levels, Marathon’s CEO believes the company could produce as many as 55-60 Bitcoins per day. Given today’s Bitcoin prices, that’s more than $1 billion per year in revenue.
Weighing Marathon’s Serious Risks
As with any investment, considering the risks of any particular stock is important. Indeed, investors need to attempt to make long-term projections for stocks they are considering buying based on their forecasts of the companies’ future cash flows.
In the case of MARA stock, there’s one key factor in everyone’s valuation model which is a big unknown: the long-term average price of Bitcoin.
I have no idea what Bitcoin is worth. I’ve seen a ton of analysis on the subject, and I’m not convinced anyone knows what the true intrinsic value of a Bitcoin is.
In my view, all cryptocurrencies are “pixie dust” investments that only have skyrocketing value because someone else is willing to pay more for them. Buying something on the basis of others doing so is the basis of most get-rich-quick schemes. I think Bitcoin mining falls squarely in this category.
I’ve been told I’m missing the bigger picture. After all, cryptocurrencies are the future of digital banking and will be the basis upon which the economy functions.
Call me a skeptic, but I just don’t think that will happen. There’s practical value in the blockchain technology underpinning cryptocurrencies. However, investing in Bitcoin never made sense to me.
Conclusion
Making projections of $1 billion of annual revenue for Marathon based on current Bitcoin prices is great. But given the volatility of cryptocurrencies in general recently, it’s impossible to guess what these digital tokens will be worth five days from now, let alone five years from now.
As a result, I strongly recommend that investors considering buying Bitcoin or the shares of Bitcoin miners like Marathon look at the risks they pose.
Most investors wouldn’t buy a blue-chip stock if they thought it could fall 20% in a day. Cryptocurrencies and the miners supporting these digital tokens can very well lose 20% of their value in a single trading session.
In my view, MARA stock is too volatile and holds too much risk for anyone with a reasonable level of risk aversion to hold.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.