Better Bitcoin Stocks: Coinbase Vs. Marathon Digital Holdings

Bitcoin‘s (BTC -0.79%) the price hit a record high of $67,567 last November. But today it trades for around $18,000. The world’s top cryptocurrency lost its luster as inflation, rising interest rates and other macro headwinds drove investors away from riskier investments.

This decline also crushed many Bitcoin-related stocks. Coin base (COIN -3.63%)one of the world’s largest cryptocurrency exchanges, and Digital Marathon (MARA -10.60%), one of the market’s top Bitcoin miners, have both lost more than 80% of their value this year. Should investors buy some of these downbeat stocks as a turnaround?

Image source: Getty Images.

Two different approaches to the Bitcoin market

Coinbase’s cryptocurrency exchange earned 8.5 million monthly transaction users (MTUs) in the third quarter of 2022. That represented a steep drop from the peak of 11.2 million MTUs in the fourth quarter of 2021.

It generates most of its revenue from transaction fees. Institutional investors accounted for 84% of trading volume in the third quarter, while the remaining 16% came from private investors. It provides access to a wide range of cryptocurrencies, but Bitcoin and Ether (ETH -1.72%) accounted for 31% and 33% respectively of the total trading volume in the last quarter. The remaining 36% came from other types of crypto assets.

Marathon owns a fleet of around 69,000 active ASIC miners, but it actually missed its original goal of bringing 133,000 miners online by mid-2022. It generates almost all of its revenue by mining Bitcoin directly. As of the end of November, it had 11,757 Bitcoins on its balance sheet.

But both companies face similar headwinds

Coinbase and Marathon exploit the crypto market in different ways, but they face similar challenges. High cryptocurrency prices initially drove more investors to Coinbase, while high Bitcoin prices increased Marathon’s revenue and the value of its own Bitcoin holdings. But both companies faced tough declines this year:

Data source: Company websites. YYYY = year-over-year.

Coinbase had a much harder landing than Marathon this year because it relied on investors actively trading cryptocurrencies. However, Marathon simply continued to bring more miners online and mine more Bitcoin – so revenue growth was more closely tied to Bitcoin’s price.

For the full year, analysts expect Coinbase’s revenue to fall 59% and Marathon’s revenue to fall 10%. We can’t put too much faith in these estimates because they are tied to the unpredictable crypto market, but high interest rates are likely to continue to drive investors away from cryptocurrencies and other riskier assets for the foreseeable future.

But which business is more sustainable?

Coinbase generated $3.6 billion in net income in 2021, but had a net loss of $2.1 billion in the first nine months of 2022. It still had $5.0 billion in cash and equivalents at the end of the third quarter, but the also had $7.1. billion in three tranches of long-term debt — with the first tranche of $1.4 billion due in 2026. Coinbase won’t go bankrupt anytime soon, but it could still be overwhelmed by debt by the end of the decade if the crypto market fails to recover.

Marathon had a net loss of $36 million in 2021, followed by an even larger net loss of $280 million in the first nine months of 2022. Its total liabilities of $805 million consist primarily of $731 million in convertible notes (with an interest rate of 1)% and a maturity date of 2026) and a term loan of USD 50 million. Marathon had just $62 million in unrestricted cash at the end of the third quarter, but its Bitcoin holdings — which it can liquidate for cash — are currently worth about $208 million.

So for Marathon, the only way forward is to continuously expand the fleet of miners, mine more Bitcoin and hope that Bitcoin prices recover to stabilize the balance. However, if the prices of Bitcoin continue to fall, it will likely not be able to compensate for the rising costs of maintaining its massive mining operations.

Which stock has the best value?

I wouldn’t buy any of these stocks right now — since it makes more sense to simply invest in Bitcoin instead of some of these capital-intensive businesses — but Coinbase seems like a smarter play for three reasons.

• First, Coinbase’s enterprise value is worth just twice this year’s sales. Marathon still looks much more expensive at ten times the sales.
• Second, Coinbase isn’t just tied to Bitcoin like Marathon: It’s better diversified across a wider range of investors and cryptocurrencies.
• Finally, Coinbase’s business is not dependent on fluctuating mining and energy costs. It just needs to keep transactions flowing and protect investors’ assets – something that disgraced rival FTX failed to do.