Coinbase (COIN 5.68%) and Marathon Digital (MARA 2.21%) represent two very different ways to invest in the Bitcoin (BTC -2.26%) market. Coinbase is one of the world's largest cryptocurrency exchanges, and it facilitates trades of Bitcoin, Ether (ETH -0.25%), Tether (USDT -0.01%), and other crypto assets. Marathon is a Bitcoin miner that mines its own Bitcoin with a massive fleet of high-end application-specific integrated circuit (ASIC) miners.
Both stocks more than tripled this year as Bitcoin's price more than doubled. That rally was driven by stabilizing interest rates, potential approvals for exchange-traded funds (ETFs) pinned to Bitcoin's spot price, and its growing popularity as a safe haven asset. But should you invest in either of these Bitcoin-driven stocks right now?
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Coinbase still has a lot to prove
Coinbase's stock might have outperformed Bitcoin's price this year, but it's still underperformed Bitcoin over the past two years. Coinbase generated weaker long-term gains than Bitcoin for three simple reasons.
First, Coinbase only generated 38% of its trading volume from Bitcoin trades in its latest quarter. Another 19% came from Ether, 15% from the Tether stablecoin, and the remaining 28% from other crypto assets -- including smaller tokens, non-fungible tokens (NFTs), and other speculative assets that flopped as interest rates rose. Its exposure to those slower-growth assets seems to be throttling its overall growth.
Second, its trading volume and revenue fell sequentially over the past two quarters, even as Bitcoin and Ether recovered. That slower trading activity suggests it's struggling to retain its users and assets. However, we can't be sure because it stopped disclosing its monthly transacting users (MTUs) and total assets on its platform this year. Lastly, the bulls are staying away as government regulators tighten their grip on Coinbase and its crypto peers.
Analysts expect Coinbase's revenue to dip 11% in 2023, compared to its 57% decline in 2022 and 545% growth in 2021. That grim outlook suggests the crypto winter is far from over.
On the bright side, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive over the past three quarters as it reined in its spending, and its $5.5 billion in liquidity should give it plenty of time to stabilize its business and profit from the crypto market's eventual recovery.
Marathon's mining business is still growing
Marathon was once a tiny patent holding company. But in 2020, it abandoned that business model, rebranded itself as a Bitcoin miner, and ordered tens of thousands of ASIC miners to capitalize on the market's growing interest in Bitcoin.
The critics initially balked at that abrupt transformation, but Marathon is now the world's largest pure-play Bitcoin miner, with 157,160 deployed miners and a hash rate capacity of 23.1 EH/s (exahashes per second). For reference, its closest competitor, Riot Platforms (RIOT -1.49%), had deployed 106,674 miners with a hash rate capacity of 11.7 EH/s by the end of October. Marathon has mined 9,812 Bitcoin year to date, while Riot has only mined 4,996 Bitcoin.
Marathon's revenue surged from $4 million in 2020 to $159 million in 2021, then declined 26% in 2022 as Bitcoin's price dropped. But in 2023, analysts expect its revenue to nearly triple to $347 million as Bitcoin's price rises, it opens two new plants, and it launches a new joint venture in Abu Dhabi. They also expect it to turn profitable by generally accepted accounting principles (GAAP) and adjusted EBITDA measures.
Marathon carries some of its mined Bitcoin on its balance sheet, but it also regularly liquidates some of those holdings to boost its own cash flows. It ended the third quarter of 2023 with $101 million in cash and $287 million in Bitcoin on its balance sheet -- representing the first time its total cash and Bitcoin position exceeded its total debt.
The better buy: Marathon Digital
Coinbase's business might eventually stabilize, but it still isn't a bargain at 29 times next year's adjusted EBITDA. Marathon trades at just 18 times next year's adjusted EBITDA -- seemingly cheap relative to its near-term growth potential. Marathon also faces fewer regulatory threats than Coinbase, provides more exposure to Bitcoin, and is still expanding its mining operations. It's still a speculative stock, but I believe it could easily outperform Coinbase if Bitcoin continues to rally.
