Marathon Digital (MARA) stock has faced a challenging start to the year, with shares dropping more than 20%.

Some of this move can certainly be tied to Bitcoin’s (BTC-USD) performance, especially considering the high expectations for this token following the SEC’s approval of spot ETFs.

Indeed, Bitcoin prices directly affect Marathon’s valuation, because Marathon’s entire business model revolves around mining Bitcoin. With debt denominated in dollars and revenue coming in the form of Bitcoin, how this cryptocurrency performs over time frame often informs Marathon’s stock price.

Accordingly, as a proxy for the price of Bitcoin, some have speculated that fund inflows into spot Bitcoin ETFs could reduce the willingness for investors to buy Bitcoin-related stocks, such as Marathon Digital.

Let’s dive into what to make of these dynamics, and what investors should consider before buying MARA stock.

Q3 Financial Results

Let’s first start by looking under the hood, and assessing Marathon’s fundamentals. In Q3 2023, the Marathon Digital reported a net income of $64.1 million, compared to a $72.5 million loss in the same period last year.

Revenues surged to $97.8 million, driven by a 467% increase in bitcoin production and a 32% rise in average bitcoin prices. The quarter saw $31.7 million in gains from selling 66% of the produced bitcoin to cover costs. 

Realized gains were offset by an $11.9 million impairment in digital asset value. Additionally, a unique benefit of $82.6 million came from debt extinguishment.

This contrasts with the year-ago period, which included a $29.8 million gain on equipment sale, a $25.0 million legal reserve, and a $39.0 million impairment related to vendor bankruptcy, none of which recurred in 2023.

Adjusted EBITDA surged to $43.7 million this year, a stark improvement from the $6.1 million loss in the previous period. Enhanced profitability drove this increase, with a total margin (excluding depreciation and amortization) reaching $38.2 million, compared to a $1.1 million loss last year.

Reported adjusted EBITDA was boosted by $19.8 million in net bitcoin gains, offsetting impairment losses, a notable improvement from the $1.4 million impairment loss in Q3 2022.

Again, here’s where Bitcoin prices matter. The company’s bottom line absolutely rocketed via a combination of higher Bitcoin production and a price surge.

Of course, with a halving event scheduled for April, production numbers should come down as difficulty increases (roughly in half). But as Marathon brings on more Bitcoin mining machines and increases its capacity, it’s possible the company’s financials remain relatively consistent. We’ll have to see, though, and I think the jury’s still out on this.

More Bitcoin Mining Sites

Marathon has been expanding its mining capacity by acquiring sites with 326 megawatts from Generate Capital subsidiaries for $178.6 million in cash, at $458,000 per megawatt. CEO Fred Thiel aims to enhance efficiencies and scale operations to 50 exahash within 18-24 months, utilizing their cutting-edge technologies.

Marathon gained sites with 390 megawatts, of which 244 are leased by other miners. With 82 megawatts ready for expansion and 64 under Marathon’s control for improvements, the move aims to cut operational costs by about 30%. 

In December, Marathon mined a record 1,853 Bitcoins, totaling 12,852 in 2023, with an 18% month-over-month increase in the average operational hash rate to 22.4 exahashes per second

MARA Stock Could Be a Buy

While Bitcoin’s resilience might protect it from an extended “crypto winter,” potential bear markets could still freeze the market. If Bitcoin sheds significant value, Marathon’s mining business might suffer, especially if coupled with rising energy costs. 

Despite expected market fluctuations, a stabilizing and rising Bitcoin price over the next decade, aligning it with mainstream assets like gold, may boost Marathon’s stock to new highs, offering potential returns for patient investors.

Right now, I think MARA stock is best suited for investors with a high risk tolerance that are looking for a Bitcoin ETF alternative, or greater upside exposure to Bitcoin prices. I’m not sure where Bitcoin will trend over the shorter-term, but I can see the thesis for holding a leading crypto mining stock for a five or 10 year period.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.