In a crowded field, Riot Blockchain (RIOT 3.24%) and Marathon Digital (MARA +6.39%) have risen to become leaders in the competitive Bitcoin mining industry. While both have found success, they have done so in vastly different ways. But only one is set up for more promised long-term success: Riot.
Here's why Riot's mining strategy will prove to be more conducive to finding profits as Bitcoin becomes more scarce over the coming years.
Image source: Getty Images.
The impact of the "halving"
In mid-April, Bitcoin will undergo its fourth halving. Occurring roughly every four years, the halving is a mechanism built into Bitcoin's code that reduces the reward distributed to miners by half. Today, miners earn a generous 6.25 Bitcoins for every block mined. But in just a couple of months, compensation will fall to just 3.125 Bitcoins.
While many Bitcoin investors are looking forward to the halving due to what has happened to Bitcoin's price after previous halvings, miners are likely less enthusiastic. With each halving, miners face a cruel reality where their revenue is effectively cut in half. The Bitcoin mining industry is already competitive, and the halving raises the stakes and shrinks the margin of error.
So, to properly evaluate Riot and Marathon, we must do so from the perspective of after the halving. From this angle, Riot's true potential begins to shine.
The tale of the tape
At first glance, Marathon looks like the better investment. During 2023, it mined more than 12,800 Bitcoins, good enough for second place among all miners. It also grew its mining capacity, measured in exahashes per second (EH/s), to an industry-leading 26.4 EH/s. Riot, on the other hand, generated 6,616 Bitcoins with its hash rate of 12.4 EH/s.
That means Marathon is roughly twice as productive as Riot. Presumably, this would mean Marathon is better suited to find success post-halving. But this assumption only accounts for half of the picture.
While production is important, efficiency is what really matters. A miner can generate more Bitcoins, but if it does so at high costs, then profitability becomes more difficult to find, especially once the halving takes place.
As it currently stands, Marathon spends around $22,000 to mine one Bitcoin. Meanwhile, Riot's expenses per Bitcoin mined hover around $2,000, making it much more efficient and much more prepared for the coming revenue cut that will accompany the halving.
NASDAQ: RIOT
Key Data Points
Riot's competitive advantage
The reason Riot enjoys such cushioned profit margins isn't because of better mining equipment or technology, but rather an innovative power strategy. All of Riot's operations take place in Texas. This means that it benefits from an independent electric grid that is unique to the Lone Star State.
With an independent energy grid, Texas allows customers to sell electricity back to the market. For a Bitcoin mining company, this is the perfect setup. When the cost to power mining equipment outweighs potential profits, a scenario that can occur when Bitcoin's price slips or electricity costs rise, Riot takes its miners offline and sells power back to the grid for a profit.
Consider the winter storm that swept through Texas in mid-January for proof of just how remarkably flexible and pivotal the power strategy is. As demand for electricity skyrocketed with people needing extra heat for their homes, Riot strategically shuttered production. By doing so, Riot generated more than $3.3 million in power and curtailment credits in January.
Over the course of a year, these power and curtailment credits begin to add up. Last year, Riot generated more than $71 million just from scaling back its operations, equivalent to 2,480 Bitcoins based on the average price for Bitcoin during 2023.
There's more to Riot than mining
While its total mining capacity doesn't put it at the top of the industry, there is more to Riot than just mining. With its cost-effective approach, Riot doesn't have an edge just over Marathon, but over the entire industry.
When the halving passes, every miner's revenue is going to get a shock. For some companies, it could spell trouble. While Riot will surely feel the effects, especially if this halving doesn't lead to a rise in Bitcoin prices like it historically has, it is much better suited to weather the storm.
Although Marathon will likely find some levels of success post-halving, Riot's prospects are much clearer. In a highly competitive and evolving industry, efficiency is more important than sheer strength. Give me Riot.
