What happened

Shares of bitcoin-mining company Marathon Patent Group (NASDAQ:MARA) came crashing down on Wednesday after the company announced a $250 million stock offering. The immediate issue here is shareholder dilution, but the massive move could hold clues to the future of the company. As of 12:30 p.m. EST, Marathon stock was down 15%.

So what

The price of bitcoin has risen dramatically over the last few months, and investors have played this trend by trading penny stocks of bitcoin miners like Marathon, Riot Blockchain, Bit Digital, and others. Even though Marathon stock is down today, it's still up a massive 2,200% over the past six months. That's how much this has been pumped thus far.

MARA Chart

Six-month returns for bitcoin-mining stocks, bitcoin, and the S&P 500. MARA data by YCharts.

Recognizing the outsized gains, Marathon recently sold stock to raise $200 million. This brought its total outstanding share count up to almost 75 million. For perspective, just six months ago, the company had 32.1 million shares outstanding. In other words, as the price of its stock has risen, the company has basically cut shareholder value in half.

Weeks ago, when Marathon raised $200 million, it used the money to purchase new bitcoin mining equipment. Now the company will offer 12.5 million more shares, diluting shareholder value by almost another 17%, which means today's 15% drop is proportional to what actually happened. Marathon will use the $250 million for general purposes, but it said it could also use the cash to acquire more bitcoin-mining power.

A surprised man looks at his computer screen.

Image source: Getty Images.

Now what

Marathon isn't the only company looking to take advantage of its high stock price. Just yesterday, self-proclaimed blockchain company Future FinTech Group stock fell because it announced it was selling 3 million shares. But this isn't just a strategy employed by obscure small-cap companies; large, well-known companies do it too. For example, Zoom Video Communications and Lemonade announced yesterday they were selling 4.2 million shares and 3 million shares, respectively.

The big difference here is that Zoom and Lemonade are diluting their shareholders by a single-digit percentage, whereas Marathon is diluting shareholders at an alarming rate. Furthermore, there's a reason Marathon might be looking to arm itself with cash right now that is rarely talked about.

Bitcoin miners are paid in bitcoin. When the price of bitcoin rises, this is obviously good, because their bitcoin paychecks are worth more. But there's a catch: As the price of bitcoin goes up, it attracts more mining power to the blockchain network, potentially decreasing an individual miner's payout.

According to Blockchain.com, the total hash rate for the bitcoin network has increased considerably over the past six months. As the total hash rate rises, Marathon will need to increase its hash rate by a proportional amount to maintain the rate at which it receives bitcoin. Think of it like this: If a job pays $100 total, and you have 100 workers, everyone gets paid $1. But if 100 more workers join the pool, then everybody gets paid $0.50 for the same job.

Marathon isn't oblivious to bitcoin's rapidly increasing hash rate. It purchased new mining equipment from Bitmain to increase its power. But it's likely planning to purchase and deploy new mining equipment to ensure it maintains its share of the bitcoin network.

This is just one of the things that can impact a bitcoin miner's profitability long term and one of the reasons bitcoin-mining stocks might not be the best way to invest in the rising price of bitcoin.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.