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Marathon Digital sold debt to buy bitcoin after BTC mining profits fell this year.
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The miner is following Michael Saylor’s lead by using borrowed money to add BTC to its balance sheet.
Billionaire Michael Saylor was one of the pioneers of large-scale corporate purchases of bitcoin {{BTC}}, using borrowed money to turn his publicly traded software developer MicroStrategy (MSTR) into one of the largest holders of the cryptocurrency in the world.
Now, another company—a surprising one—is following a similar strategy. It’s a bitcoin miner, a company that can theoretically acquire discounted BTC by mining. The fact that it’s following Saylor’s playbook, selling debt to finance bitcoin purchases and not using that borrowed money to buy equipment to mine more coins, shines a spotlight on just how tough the mining industry has become this year.
The miner is Marathon Digital (MARA), which this month sold $300 million worth of convertible bonds, bonds that can be converted into stock, and used most of the proceeds to buy 4,144 bitcoin.
Rather than buying more mining rigs, “the current price of mining hash indicates that buying bitcoin using funds from debt or equity issuance is more beneficial for shareholders until conditions improve,” the largest publicly traded miner recently reported on X. “Hash price” is a measure of the profitability of mining.
MicroStrategy’s bitcoin accumulation strategy was widely criticized when prices plummeted in 2022, leaving the company’s stake underwater. No one is laughing now, as MicroStrategy’s bitcoin stash is worth billions more than the company paid for it.
Read more: Michael Saylor’s MicroStrategy Bitcoin Bet Surpasses $4 Billion in Profits
MicroStrategy and Marathon’s paths in the stock market were largely similar after Saylor started buying bitcoin in 2020. Both were essentially proxies for the price of bitcoin — an attractive quality in the era before bitcoin ETFs were approved earlier this year.
But this year has seen a huge divergence. MicroStrategy shares have risen 90% as they continue to track the price of bitcoin. Marathon has fallen by about 40% as the mining business has become much more difficult. The Bitcoin halving in April halved the reward for mining bitcoin, significantly reducing the primary source of income for miners.
Read more: Bitcoin Halving Is A ‘Show Me the Money’ Moment For Miners
Amid that decline, Marathon employed a “full HODL” strategy, keeping all the bitcoins it mined and raising money to buy more.
“Adopting a full HODL strategy reflects our confidence in the long-term value of bitcoin,” Fred Thiel, Marathon’s chairman and CEO, said in a statement last month. “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 hold bitcoin as a reserve asset.”
Not long after that HODL strategy debuted, it announced the $300 million debt offering. Marathon now owns more than 25,000 bitcoin, second only to MicroStrategy among publicly traded companies.
Profit shrinkage
The price difference between MicroStrategy and Marathon is no surprise, given the problems in mining. The industry is crowded, competitive, and plagued by higher costs. To make matters worse, the Bitcoin network’s hashrate and difficulty—two measures of how hard it is to create new bitcoins—are constantly increasing.
JPMorgan recently said that mining profitability fell to an all-time low as network hashrate surged in the first two weeks of August, while hashprice (the average reward miners get per unit of computing power they spend mining) is still about 30% below December 2022 levels and about 40% below pre-halving levels. Miners are now under so much pressure that they have been forced to pivot from purely mining – once a very profitable strategy – to diversifying into other ventures like artificial intelligence just to survive. In fact, Swan Bitcoin, a miner, just canceled its IPO and closed down a portion of its mining operations due to a lack of short-term revenue.
“At current hash price levels, a significant portion of the network is still profitable, but only marginally so,” Galaxy Research said in a July 31 note. “Some miners who are still hesitant may continue operating because they can generate positive gross profits. However, when operating expenses and additional cash costs are factored in, many miners are unprofitable and are slowly running out of cash,” the report said.
Read more: Bitcoin Mining Is Back (Except It’s AI Now)
Additionally, the January launch of bitcoin exchange-traded funds in the U.S. gave institutional investors who don’t want to buy cryptocurrencies but still want crypto investment exposure a more direct route than buying shares in bitcoin miners. After the ETFs rolled out, short selling the miners and going long on the ETFs became a common trading strategy among institutional investors, effectively limiting the appreciation of the miners’ share price.
To stay competitive and survive the squeeze, miners have few choices other than to diversify. Even if a miner with a strong balance sheet like Marathon wants to remain a pure-play mining company, it must either invest more capital in an already capital-intensive business or acquire competitors. Both options take time and carry significant risks.
It is therefore not difficult to understand why Marathon took up MicroStrategy’s success story and bought bitcoins on the open market.
“During periods of significant price appreciation, we may focus exclusively on mining. However, with Bitcoin moving sideways and rising costs, as has been the case recently, we expect to opportunistically ‘buy the dips,’” Marathon said.
Nishant Sharma, founder of BlocksBridge Consulting, a research and communications firm focused on the mining sector, agrees with Marathon’s BTC accumulation strategy. “With the hash price of bitcoin mining at record lows, companies need to diversify into non-crypto revenue streams such as [artificial intelligence or high-performance computing] “Or double down on bitcoin to capture investor excitement around an expected crypto boom, similar to MicroStrategy’s approach,” he said.
“For MARA, the largest bitcoin producer, it makes sense to choose the latter: HODLing bitcoins mined at a lower cost than the market price and taking on debt to buy more, thereby increasing its BTC supply.”
Debt financing refund?
Marathon’s bitcoin purchases aren’t new. The miner bought $150 million worth of bitcoin in 2021. What’s new is that Marathon used convertible senior notes, a type of debt that can be converted into shares of the company, to raise money to buy more BTC — similar to MicroStrategy’s strategy. Saylor’s firm has raised $4 billion to buy bitcoin to date, according to Bernstein, helping the company capitalize on potential bitcoin upside while reducing the risk of being forced to sell the digital asset on its balance sheet — a strategy that appears to have played well with institutional investors.
Additionally, convertible debt is relatively inexpensive for companies and avoids the immediate dilution of shareholders’ equity interests that an equity offering would. “With bitcoin prices at an inflection point and expected market tailwinds blowing, we see this as an opportune time to increase our holdings, using convertible senior notes as a lower-cost, non-dilutive source of capital,” Marathon said.
The miner offered its notes at a yield of 2.125%, cheaper than the current 10-year U.S. Treasury yield of 3.84% and comparable to MicroStrategy’s last hike of 2.25%. The miner was able to offer such a low rate and still attract investors because investors get a steady income from the debt and retain the option to convert the notes into equity, tapping into the potential upside of the stock.
“The advantage of convertible bonds over traditional debt financing is that $MARA can attract a much lower interest rate than it otherwise would, as the bonds can be converted into equity,” Blockware Intelligence said in a report.
Being able to raise debt at low interest rates also allows Marathon to bolster its war chest for potential acquisitions. “The bitcoin mining industry is in the early stages of consolidation and the natural acquirers are companies with large balance sheets,” said Ethan Vera, Chief Operating Officer of Luxor Tech. “By adding a bitcoin balance sheet position, companies can raise capital with a clear use of funds while preparing their balance sheets for potential M&A.”
In fact, such debt financing could see a comeback for the entire mining sector, which was wiped out of the market during the crypto winter as many miners defaulted on poorly structured loans. “Previously, the debt financing options available to miners were primarily structured around ASIC collateral,” Galaxy said, adding that the lack of liquidity on those loans after the 2022 price drop hurt the entire sector. Other miners that recently tapped into debt markets include Core Scientific (CORZ) and CleanSpark (CLSK).
“We believe the sector is now in a much better position to take on debt and not just rely on equity issuance to grow,” Galaxy said.
Read more: Bitcoin Bottom Near as Miners Capitulate Near FTX Implosion Level: CryptoQuant
