Better Bitcoin Stock: Coinbase vs. Marathon Digital Holdings

Bitcoin‘s (BTC 0.71%) price hit an all-time high of $67,567 last November. But today it trades at about $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.

That decline also crushed many Bitcoin-related stocks. Coinbase (COIN -3.63%), one of the world’s largest cryptocurrency exchanges, and Marathon Digital (MARA -10.60%), one of the market’s top Bitcoin mining companies, both shed more than 80% of their value this year. Should investors buy either of these beaten-down stocks as a turnaround play?

Two different approaches to the Bitcoin market

Coinbase’s cryptocurrency exchange served 8.5 million monthly transacting users (MTUs) in the third quarter of 2022. That represented a steep drop from its 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 its trading volume in the third quarter, while the remaining 16% came from retail investors. It provides access to a wide range of cryptocurrencies, but Bitcoin and Ether (ETH 1.66%) accounted for 31% and 33%, respectively, of its total trading volumes in its latest quarter. The remaining 36% came from other types of crypto assets.

Marathon owns a fleet of about 69,000 active ASIC miners, but it actually missed its original target of bringing 133,000 miners online by the middle of 2022. It generates nearly all of its revenue by directly mining Bitcoin. As of the end of November, it was holding 11,757 Bitcoins on its balance sheet.

But both companies face similar headwinds

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

Data source: Company websites. YOY = Year-over-year.

Coinbase suffered a much harder landing than Marathon this year because it relied on investors actively trading cryptocurrencies. Marathon, however, simply kept bringing more miners online and mining more Bitcoin — so its revenue growth was more tightly tethered to Bitcoin’s price.

For the full year, analysts expect Coinbase’s revenue to decline 59% and for Marathon’s revenue to dip 10%. We can’t put too much faith in those estimates because they’re pegged to the unpredictable crypto market, but high interest rates will likely 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 it posted a net loss of $2.1 billion in the first nine months of 2022. It still held $5.0 billion in cash and equivalents at the end of the third quarter, but it was also shouldering $7.1 billion in three tranches of long-term debt — and the first $1.4 billion tranche matures in 2026. Coinbase won’t go bankrupt anytime soon, but it could still be overwhelmed by its debt by the end of the decade if the crypto market fails to recover.

Marathon posted a net loss of $36 million in 2021, followed by an even wider net loss of $280 million in the first nine months of 2022. Its total liabilities of $805 million mainly consist of $731 million in convertible notes (with an interest rate of 1% and a maturity date of 2026) and a term loan of $50 million. Marathon only held $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 path forward is to expand its fleet of miners continuously, mine more Bitcoin, and hope that Bitcoin prices recover to stabilize its balance sheet. But if Bitcoin’s prices continue to decline, it will likely be unable to offset the rising costs of maintaining its massive mining operations.

Which stock is the better value?

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

• First, Coinbase’s enterprise value is worth just twice this year’s sales. Marathon still looks a lot pricier at ten times sales.
• Second, Coinbase isn’t only pegged to Bitcoin like Marathon: It’s better diversified across a wider range of investors and cryptocurrencies.
• Lastly, Coinbase’s business isn’t dependent on fluctuating miner and energy costs. It merely needs to keep its transactions flowing and protect its investors’ assets — something which its disgraced rival FTX failed to do.