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

Marathon Digital sold bonds to fund bitcoin purchases, following the route Saylor's MicroStrategy has taken to big stock market gains, as mining profits dwindle.

Bitcoin mining company Marathon Digital (MARA) is adopting a strategy pioneered by billionaire Michael Saylor, using borrowed money to buy large amounts of bitcoin (BTC) while pausing purchases of new mining equipment.

Marathon announced this month that it sold $300 million of convertible notes, a type of debt that can be turned into the company's shares, and used most of the proceeds to buy 4,144 bitcoin. Rather than purchase more mining rigs, "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," the largest publicly traded miner posted recently on X. "Hash price" is a measure of mining profitability.

Saylor, the CEO of software developer MicroStrategy (MSTR), began making large-scale corporate purchases of bitcoin in 2020, using borrowed money to turn his company into one of the world's largest holders of the cryptocurrency. While MicroStrategy's bitcoin accumulation strategy was widely criticized last year as prices crashed, putting the company's stake underwater, no one is laughing now, given MicroStrategy's bitcoin hoard is now worth billions more than the company paid.

Both MicroStrategy and Marathon are essentially proxies for bitcoin's price – an attractive quality in the era before bitcoin ETFs were approved earlier this year. But this year, there's been a massive divergence. MicroStrategy's stock soared 90% as it continued to track bitcoin's price, while Marathon has plummeted about 40% as the mining business got much harder.

The Bitcoin halving in April slashed the reward for mining bitcoin in half, substantially reducing miners' primary source of income. Amid that plunge, Marathon adopted a "full HODL" strategy of keeping all the bitcoin it mines – and raising money to buy more.

"Adopting a full HODL strategy reflects our confidence in the long-term value of bitcoin," said Marathon's Chairman and CEO Fred Thiel 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 all hold bitcoin as a reserve asset."

Not long after debuting that HODL strategy, it announced the $300 million debt offering. Marathon now owns more than 25,000 bitcoin, second only to MicroStrategy among publicly traded companies.

Mining Woes

The share price divergence between MicroStrategy and Marathon isn't a surprise, given the woes in mining. The industry is overcrowded, more competitive and facing increased costs. To make matters worse, the Bitcoin network's hashrate and difficulty – two measures of how hard it is to create new bitcoin – are getting higher.

JPMorgan recently said that mining profitability fell to all-time lows as the network hashrate rose in the first two weeks of August, while hashprice (the average reward miners get per unit of computing power they direct toward mining) is still around 30% lower than the levels seen in December 2022 and about 40% below pre-halving levels. Miners are now so stressed that they've been forced to pivot from purely being miners – once a highly profitable strategy – to diversifying into other ventures such as artificial intelligence just to survive. Swan Bitcoin, a miner, even just canceled its initial public offering and shut down some of its mining business due to a lack of revenue in the near term.

"At current hashprice levels, a meaningful proportion of the network is still profitable, but only marginally," said Galaxy Research in a note on July 31. "Some miners on the fence may continue to operate because they can generate positive gross profits. However, when factoring in operating expenses and additional cash costs, many miners find themselves unprofitable and slowly running out of cash," the report added.

Moreover, the January launch of bitcoin exchange-traded funds in the U.S. gave institutional investors that don't want to buy cryptocurrencies, yet still want crypto investment exposure, a more direct route than buying stock in bitcoin miners. After the rollout of ETFs, short selling the miners and going long on ETFs became a prevalent trading strategy among institutional investors, essentially capping the share price appreciation of the miners.

To stay competitive and to survive the squeeze, miners have few choices besides diversifying. Even if a miner with a strong balance sheet like Marathon wants to stay a pure-play mining company, it needs to either invest more capital into an already capital-intensive business or buy competitors. Both options take time and come with significant risk.

In light of that, it's not hard to see why Marathon took a page out of MicroStrategy's successful playbook and bought bitcoin in the open market. "During periods of significant price appreciation, we may focus solely on mining. However, with bitcoin trending sideways and costs increasing, which has been the case recently,