Shares of Marathon Digital Holdings (NASDAQ:MARA), a company mining and holding Bitcoin (CRYPTO:BTC), fell on Tuesday following the release of financial results for the first quarter of 2021. As of 2 p.m. EDT, the stock was down 7%.
The primary story here is Marathon's update of its Bitcoin mining operations. For the first quarter, the company mined 192 Bitcoin tokens. But from the end of the quarter to May 6, it mined 194 more, reflecting its growing mining power. No doubt this is encouraging to shareholders.
When it comes to revenue, Marathon and other miners are in a tricky place, as cryptocurrency regulations are still playing catch-up. Miners process transactions on the Bitcoin blockchain network and are compensated in the cryptocurrency for their services. This leaves these players unsure of how to best apply accounting rules to the top line. But Marathon has decided to recognize revenue when it receives Bitcoin based on the price at the time.
For the first quarter, Marathon generated revenue of $9.2 million, which was up 1,445% year over year. That growth certainly looks impressive. However, this company hasn't sold any Bitcoin since October, so it hasn't actually had cash inflows in U.S. dollars. That's just how much its Bitcoin was worth when it was added to the balance sheet.
Because of this nuance with the top line, Marathon's bottom line needs perspective as well. The company reported net income of over $83 million -- that's huge for a small-cap company like Marathon. However, it bought over 4,800 Bitcoin tokens in January, and ongoing mining operations have taken its holdings to 5,324. While sitting on the balance sheet, these tokens have increased in value substantially. In fact, because of accounting rules, the company had to update the value of its Bitcoin holdings, resulting in a whopping $137 million gain on paper. That's certainly good for Marathon, and it shouldn't be downplayed. But when thinking in terms of profits, a paper gain isn't quite the same as increasing its cash position through business operations.
So Marathon's top and bottom lines were greatly improved from last year. But both numbers have asterisks. And with the price of Bitcoin down in the last couple of days, Marathon stock was down today as well.
If you're buying Marathon stock for the long term, then the top and bottom lines aren't really the most important factors here. A long-term thesis assumes that the company can increase its mining power (known as its hash rate) to mine more Bitcoin, and that the price of Bitcoin will keep going up. For the first point, it does appear that Marathon's hash rate is growing faster than that of the Bitcoin blockchain network, which results in more Bitcoin mined for Marathon. And it expects to keep increasing its hash rate throughout 2021.
The price of Bitcoin, however, is outside of Marathon's control. There are arguments to be made both ways when it comes to the future price of Bitcoin and other cryptocurrencies. Investors should note that accounting rules gave the company net income of $83 million in the first quarter even though it had an operating loss of $47 million. That rule can go both ways, though. If the price of Bitcoin stumbles in future quarters, then Marathon could be looking at an outsize paper loss down the line.