Bitcoin Mining Is So Rough a Miner Adopted Michael Saylor’s Successful BTC Strategy

In an unexpected move, another company operating in the bitcoin mining industry is adopting a similar approach. This company could potentially acquire discounted Bitcoin by mining it. The intriguing aspect is that they seem to be emulating MicroStrategy’s strategy, selling debt to finance Bitcoin purchases, rather than using the borrowed funds to purchase additional mining equipment. This action underscores the increased competitive nature of the mining sector in 2021.

This month, Marathon Digital, the identified miner, offloaded $300 million worth of convertible notes (essentially bonds that can transform into shares) and utilized a significant portion of the earnings to buy approximately 4,144 bitcoins.

Instead of buying additional mining rigs, considering the current mining hash rate and the internal rate of return (IRR), it appears that acquiring bitcoin using funds from debt or equity offerings would yield better returns for shareholders until conditions become more favorable, according to the largest publicly traded miner’s recent statement on X. The term “hash price” refers to the measure of mining profitability.

Critics heavily scrutinized MicroStrategy’s approach to buying bitcoin when its value plummeted in 2022, causing their investment to fall below market value. However, with MicroStrategy’s bitcoin holdings now valued at significantly more than they initially paid, it seems the skeptics have been proven wrong.

In the stock market, MicroStrategy and Marathon followed quite a parallel course starting from 2020 when Saylor started investing in Bitcoin. Essentially, they mirrored Bitcoin’s price movements – a notable trait during the period preceding the approval of Bitcoin ETFs earlier this year.

However, this year, there’s been a significant split in trends. MicroStrategy’s shares have skyrocketed by 90%, mirroring bitcoin’s price increase. On the other hand, Marathon has seen a decline of approximately 40% due to the mining industry becoming more challenging. The Bitcoin halving in April cut the mining reward for bitcoin in half, significantly diminishing miners’ main income source.

In the midst of this dip, Marathon decided to implement a “complete hold” strategy, which means keeping every bitcoin they mine and using funds to purchase even more.

In his recent statement, Fred Thiel, head of Marathon, expressed that embracing a complete ‘HODL’ approach demonstrates their faith in bitcoin’s long-term worth. He believes bitcoin serves as the world’s premier treasury reserve asset and advocates for sovereign wealth funds to own it. Furthermore, he encourages governments and corporations to store bitcoin as a part of their reserves.

Shortly following the unveiling of its HODL strategy, they declared a $300 million bond sale. Currently, Marathon is the company with the second largest Bitcoin holdings (over 25,000 coins) among publicly traded entities, only surpassed by MicroStrategy.

Profit squeeze

It’s not surprising that MicroStrategy and Marathon’s stock prices differ significantly, considering the challenges in the mining sector. The industry is becoming increasingly congested, leading to intensified competition, and costs are on the rise. To add to these troubles, the Bitcoin network’s hashrate and difficulty – indicators of how difficult it is to mine new bitcoins – are escalating.

In August’s first two weeks, JPMorgan reported that mining profitability plunged to record lows as network hashrate increased. Meanwhile, hashprice, or the average earnings miners receive per unit of computational power, remains approximately 30% lower than December 2022 levels and around 40% below pre-halving levels. Consequently, miners are under immense pressure and have started to explore other business areas such as artificial intelligence in order to stay afloat. In fact, Swan Bitcoin, a mining company, has recently called off its initial public offering and scaled back its operations due to short-term revenue issues.

According to Galaxy Research’s recent note dated July 31st, a substantial number of miners are still making small profits due to current hash prices, but they are barely breaking even. Some miners on the edge might continue to mine because they have positive gross earnings. However, when considering operating costs and additional expenses, many miners discover that they are actually losing money and depleting their cash reserves.

Furthermore, the debut of Bitcoin exchange-traded funds (ETFs) in January provided institutional investors with an alternative investment option, as they could invest in cryptocurrencies indirectly without actually buying bitcoins. Instead, they could buy stocks in mining companies. With the introduction of ETFs, a popular trading strategy among these institutions involved short-selling the miners and investing long in the ETFs, which effectively limited the increase in the share prices of the miners.

In order to remain competitive and thrive amidst tightening market conditions, miners are left with limited alternatives other than broadening their operations. For instance, a company such as Marathon, which boasts a robust financial standing, might still find it necessary to either pour more funds into an already capital-heavy sector or acquire rival companies. Each of these paths requires time and carries substantial risk.

Given those circumstances, it’s quite understandable why Marathon decided to follow MicroStrategy’s winning strategy and purchase bitcoin directly from the market.

During times when the price of Bitcoin is rapidly rising, our primary emphasis might be solely on mining. But since Bitcoin’s trend has been relatively flat, with costs climbing, as observed in recent times, we plan to take advantage of any temporary price drops by strategically purchasing during dips. This was stated by Marathon.

Nishant Sharma, the founder of BlocksBridge Consulting – a research and communication company focused on the mining sector – supports Marathon’s Bitcoin accumulation strategy. He suggests that with Bitcoin mining hash prices at all-time lows, mining companies should consider expanding into alternative revenue streams such as artificial intelligence or high-performance computing, or else they should intensify their Bitcoin holdings to capitalize on investor enthusiasm for a potential cryptocurrency market rally, much like MicroStrategy’s strategy.

Return of debt financing?

Moreover, convertible debt typically comes with a low cost for companies and doesn’t instantly reduce the ownership shares of existing shareholders, which is often the case in stock offerings. In light of bitcoin prices reaching a significant turning point and predicted favorable market conditions, we view this as an ideal time to expand our holdings, utilizing convertible senior notes as a less expensive funding option that doesn’t immediately dilute ownership. Marathon made this statement.

The mining company presented its investment notes with an interest rate of 2.125%, which is lower than the current 10-year U.S. Treasury rate of 3.84% and similar to MicroStrategy’s recent funding at 2.25%. This low rate was attractive to investors because they receive a consistent income from these debts and have the opportunity to convert the notes into shares, potentially benefiting from any increase in the company’s stock value.

According to Blockware Intelligence’s report, convertible notes offer a significant advantage for $MARA as they can secure a considerably lower interest rate compared to traditional debt financing, since these notes can potentially be transformed into company shares.

Having access to low-interest debt enables Marathon to strengthen its financial reserves for possible takeovers in the future. The bitcoin mining sector is currently undergoing consolidation, and it’s the firms with substantial assets who are most likely to be the acquirers, stated Ethan Vera, COO of Luxor Tech. By acquiring Bitcoin holdings, companies can attract capital more easily due to a clear purpose for funds, while simultaneously readying their financial statements for potential mergers and acquisitions (M&A).

It’s possible that debt financing for mining operations might re-emerge as a common practice across the industry, following its absence during the crypto winter when many miners failed to meet their loan obligations due to poorly designed loan structures. As Galaxy pointed out, the loans were predominantly based on collateralizing ASICs (Application-Specific Integrated Circuits). The collapse of cryptocurrency prices in 2022 led to a lack of liquidity for these loans, causing significant harm to the sector. Besides Galaxy, companies like Core Scientific (CORZ) and CleanSpark (CLSK) have recently turned to debt markets as well.

According to Galaxy, the industry currently has stronger financial footing, allowing it to assume some debt rather than relying exclusively on issuing new equity for its expansion.