Marathon Digital Holdings, Inc. (NASDAQ:MARA), a digital asset technology company that mines cryptocurrencies, has a Beta (5Y Monthly) of 4.64. This figure is not only extreme, but too risky.
A stock that moves precisely in tandem with broader stock market volatility has a Beta of 1. This means that MARA stock moves multiple times more than the S&P 500 daily performance. Conservative investors will be better off avoiding the stock, but traders and investors who are risk-lovers may find investment opportunities in these wild MARA stock price swings.
Shares of Marathon Digital Holdings have losses of around 35% year-to-date, while the S&P 500 has year-to-date losses of approximately 7%. If the statistical theory is correct, then MARA stock should have even bigger losses. Is there a specific reason for this statistical error?
Statistics do not always tell the whole truth, contrary to the fundamentals. President Biden has signed an executive Order “outlining the first-ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” This Order is focused on “six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”
What this Executive Order Means for Marathon Digital
The Executive Order should be interpreted as a green light to expedite the regulation of digital assets. It is stated that it will encourage regulators to address the systemic financial risks posed by digital assets. Extra caution should be placed on the word “systemic.” Systemic risk is much more severe than idiosyncratic risk, as systemic risk is about the danger of the entire financial system.
In the Order, there is a mention to mitigate “illicit finance.” Russia’s invasion on Ukraine and the sanctions imposed on Russia set the stage for a financial war to break out. Some believe cryptocurrencies to be both an inflation hedge and a haven from the fiat monetary system.
Recently, Several Russian banks were cut off from the society of worldwide interbank financial telecommunication (SWIFT) and this made transferring money difficult. People wanting to support Ukraine made donations in cryptocurrencies and Russian citizens may have switched to buying cryptocurrencies to freely move money in and out of Russia.
I find the idea of cryptocurrencies as a safe-haven to be a joke. Safe-havens are the Japanese Yen, gold, and the U.S Dollar. Cryptocurrencies have nothing in common with these financial assets.
With upcoming regulations, the cryptocurrency market will take a big hit and will lose anonymity. The odds of people dumping rather than buying cryptocurrencies are much higher. This can harm a company that holds a very large number of Bitcoin (BTC-USD) as assets and investments, such as Marathon Digital Holdings.
Risks with MARA Stock
The fourth-quarter (Q4) 2021 earnings report showed the firm raised $747.5 million in a convertible note offering in which the notes are unsecured and the coupon rate is 1%. In 2020, Marathon Digital Holdings had long-term debt of only $62,500. How do you pay off debt the best way? By generating positive free cash flow. Unfortunately, the firm generates negative free cash flow.
Despite the surge of revenue by 3,353% to $150.5 million in 2021 from $4.4 million in 2020, the loss from operations in Q4 was $85.1 million. This is wider than the loss of $5 million in Q4 2020.
Has this massive growth in revenue been the catalyst for profitability? The answer is no as a net loss in 2021 was $36.2 million, or negative $0.36 per diluted share, compared to a net loss of $10.4 million, or negative $0.13 per diluted share in 2020.
The fundamentals have become worse in 2021 versus 2020 except for higher cash and cash equivalents.
Investing is a constant adjustment between risk and return. I wonder about the initial conversion rate of senior notes. According to Marathon Digital:
“The initial conversion rate is 13.1277 shares of common stock per $1,000 principal amount of notes, which represents an initial conversion price of approximately $76.17 per share of common stock.”
Today, MARA stock is selling for around $21 per share. That will leave investors in these notes running for the exit as fast as they can.
MARA stock has a plethora of risks now as cryptocurrency will get a huge shock in regulation soon. It is wiser to avoid this crypto mining stock.
A surge in revenue with a widening net loss is like eating tons of candy and not expecting to need a dentist. A hole will be formed to alert you that something is wrong. Marathon Digital Holdings already has a couple of holes in its business and financial performance that it should try to close as quickly as possible.
On the date of publication, Stavros Georgiadis, CFA 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 InvestorPlace.com Publishing Guidelines.