The Shift to Bitcoin Accumulation Strategies in Mining: Marathon Digital’s New Approach

The Rise of Bitcoin Accumulation Strategies in the Mining Sector

Billionaire Michael Saylor is renowned for his trailblazing approach to large-scale corporate bitcoin (BTC) acquisitions. Through strategic borrowing, he transformed his publicly traded software firm, MicroStrategy (MSTR), into one of the largest holders of bitcoin globally. Now, another unexpected player is mirroring this strategy: a bitcoin mining company that has opted to sell debt to finance its bitcoin purchases instead of investing in mining equipment. This decision underscores the significant challenges faced by the mining industry in recent times.

The company in question is Marathon Digital (MARA), which recently raised $300 million through the sale of convertible notes—bonds that can be converted into equity—and utilized the majority of these proceeds to acquire 4,144 bitcoin. Instead of expanding its mining operations, Marathon determined that “given the current mining hash price, the internal rate of return (IRR) indicates that purchasing bitcoin using funds from debt or equity issuances is more beneficial to shareholders until conditions improve,” as stated by the largest publicly traded miner on X. The term “hash price” refers to a metric that gauges mining profitability.

MicroStrategy’s method of accumulating bitcoin faced considerable criticism following the market crash in 2022, which left the company’s investments in the red. However, as time has passed, MicroStrategy’s bitcoin portfolio has significantly appreciated, now worth billions beyond its original investment. The paths of MicroStrategy and Marathon in the stock market were quite similar after Saylor began his bitcoin purchases in 2020, with both companies acting as proxies for bitcoin’s price—an appealing factor before the approval of bitcoin ETFs early this year.

Yet, in 2023, a stark divergence has emerged. MicroStrategy’s stock has surged approximately 90%, closely tracking bitcoin’s price. In contrast, Marathon’s stock has declined nearly 40% as the mining sector has become increasingly challenging. The upcoming Bitcoin halving in April reduced the mining reward by half, significantly impacting miners’ primary income source.

In response to these challenges, Marathon adopted a “full HODL” strategy, committing to retain all mined bitcoin while also raising capital to purchase additional coins. “Adopting a full HODL strategy reflects our confidence in the long-term value of bitcoin,” stated Fred Thiel, Marathon’s chairman and CEO, in a recent announcement. He emphasized, “We believe bitcoin is the world’s best treasury reserve asset and support the idea of sovereign wealth funds holding it. We encourage governments and corporations to all hold bitcoin as a reserve asset.”

The Profit Squeeze in Mining

The share price disparity between MicroStrategy and Marathon is not surprising, given the ongoing struggles within the mining industry. The sector is now overcrowded, increasingly competitive, and grappling with rising operational costs. Compounding these issues, the Bitcoin network’s hashrate and difficulty—two critical indicators of how challenging it is to mine new bitcoin—are on the rise. JPMorgan recently reported that mining profitability has plummeted to all-time lows as the network hashrate surged in early August, while hash price remains around 30% lower than in December 2022 and approximately 40% below pre-halving levels.

Miners are feeling the pressure to pivot away from traditional mining strategies, which were once highly lucrative, and explore diversification into other ventures, such as artificial intelligence, to remain viable. Some companies, like Swan Bitcoin, have even canceled initial public offerings and scaled back mining operations due to insufficient revenue in the near term. “At current hash price levels, a meaningful proportion of the network is still profitable, but only marginally,” noted Galaxy Research in a report dated July 31. “While some miners may continue operations because they can generate positive gross profits, many find themselves unprofitable when considering operating expenses and additional cash costs.”

The introduction of bitcoin exchange-traded funds (ETFs) in the U.S. earlier this year has provided institutional investors with a more straightforward method to gain crypto exposure without directly buying cryptocurrencies. Following the rollout of these ETFs, many institutional investors have opted to short-sell mining stocks and invest in ETFs instead, effectively capping the appreciation potential of miner stock prices.

To remain competitive and navigate the current challenges, miners have limited options aside from diversifying their business models. Even well-capitalized miners like Marathon face the dilemma of whether to continue investing heavily in mining or pursue acquisitions of competitors. Both paths are time-consuming and carry inherent risks. In light of these circumstances, Marathon’s choice to adopt a strategy similar to MicroStrategy’s and purchase bitcoin directly in the open market makes sense. “During periods of significant price appreciation, we may focus solely on mining. However, with bitcoin trending sideways and costs increasing, we expect to opportunistically ‘buy the dips,'” Marathon announced.

The Return of Debt Financing in Mining

Marathon’s bitcoin purchases are not unprecedented; the miner previously acquired $150 million worth of bitcoin back in 2021. However, the recent decision to utilize convertible senior notes—debt that can be converted into company shares—to raise funds for additional bitcoin purchases represents a new development, mirroring MicroStrategy’s successful approach. According to Bernstein, Saylor’s company has raised a staggering $4 billion to acquire bitcoin, allowing it to capitalize on potential price increases while minimizing the risk of being forced to liquidate its digital assets.

Convertible debt typically incurs lower costs for companies and avoids the immediate dilution of shareholder equity associated with stock offerings. “With bitcoin prices at an inflection point and anticipated market tailwinds, we see this as an opportune moment to increase our holdings, employing convertible senior notes as a lower-cost capital source that is not immediately dilutive,” Marathon stated. The miner issued its notes at a 2.125% interest rate, which is lower than the current 10-year U.S. Treasury rate of 3.84% and comparable to MicroStrategy’s latest offering at 2.25%. The ability to secure such a low rate while still attracting investors is attributed to the appeal of a steady income from the debt, combined with the potential for equity conversion.

The opportunity to raise funds at a favorable interest rate also positions Marathon well for future acquisitions. “The bitcoin mining industry is in the early stages of consolidation, and the natural acquirers are the companies with large balance sheets,” noted Ethan Vera, COO of Luxor Tech. “Building a bitcoin position enhances a company’s ability to raise capital with a clear purpose while preparing its balance sheet for potential mergers and acquisitions.” In fact, the return of debt financing could signal a broader trend for the mining industry, which saw this option diminish during the crypto winter when numerous miners defaulted on poorly structured loans. Recent data shows other miners, including Core Scientific (CORZ) and CleanSpark (CLSK), also tapping into debt markets.

Galaxy Research concluded, “We believe the industry is now in a much stronger position to take on debt without relying solely on equity issuance for growth.”