Blowing bubbles: Market pumps up Marathon Digital stock ahead of earnings

Marathon Digital Holdings (NASDAQ: MARA) stock caught a huge bid on Monday, with the share price up 19% in afternoon trading. However, it’s all fun and games until someone gets hurt, and sensible investors should consider the consequences of chasing crypto-fueled rallies.

This certainly isn’t a call to short-sell MARA stock, as that’s just asking for trouble during a time when stretched valuations can keep on stretching. At the same time, even Bitcoin (BTC-USD) believers can choose to pump the brakes when a cryptocurrency-mining stock embarks on an unprovoked moonshot.

Front-running the earnings event

Make no mistake about it. Bitcoin-mining stocks are volatile assets, and big price moves are par for the course. It’s not unusual for Marathon Digital stock to rally or retreat 5% or more in a single day.

Unlike the variety of spot bitcoin exchange-traded funds (ETFs) that are available today, MARA stock doesn’t move exactly in tandem with the price moves of bitcoin. On some days, the stock magnifies the cryptocurrency’s rallies and dips, and many risk-tolerant traders are perfectly fine with that.

However, Monday’s move was unusual. Bitcoin was actually down slightly on the day, hovering at around $63,000. Meanwhile, as I mentioned earlier, Marathon Digital stock was up 19% halfway through the trading day.

Granted, since MARA stock is a stock, it can also move on news in the stock market. The major stock-market indexes were up on Monday but not extraordinarily so. In other words, this wasn’t an instance of the stock market’s rising tide lifting Marathon Digital’s boat.

Furthermore, I didn’t find any company-specific news catalyst. Marathon Digital’s first-quarter earnings report and conference call aren’t scheduled to occur until May 9. However, it seems quite probable that eager short-term stock traders are front-running that upcoming earnings event.

MARA stock isn’t necessarily a meme stock like GameStop (NYSE: GME) stock was in 2021, but it does have meme-like qualities due to its volatility and ultra-dedicated following. Interestingly, GameStop stock crashed on Monday, illustrating the point that stock dumps often follow stock pumps.

It’s a Marathon, not a sprint

Serious investors should always be mindful of the difference between trading on news events and investing for the long haul. The recent bitcoin-halving event provides a good example of this difference.

Nimble traders who bought bitcoin in anticipation of April’s halving event may have netted a quick profit. In contrast, investors who thought the halving would spark a massive rally were surely disappointed as the rally ran out of steam soon after the halving event.

In other words, sensible investors shouldn’t base their long-term portfolio strategies on a single event. It’s deep research and big-picture thinking that enable better returns over time.

Deep research does uncover some positive big-picture catalysts for Marathon Digital. The company is a premier Bitcoin miner with powerful equipment. Not long ago, Marathon Digital increased its hash-rate target for fiscal year 2024 from between 35 and 37 exahash per second (EH/s) to a new target of 50 EH/s.

That’s a whole lot of hash power, and Marathon Digital is among the most active Bitcoin miners around. In April 2024, the company produced 850 Bitcoin, up 21% year over year when compared to the 702 bitcoins that Marathon Digital produced in April 2023.

After the halving: Now, what?

At this point, prospective investors might wonder whether miners like Marathon Digital can sustain their current business models after the bitcoin-halving event. Indeed, it is problematic for Marathon Digital that the reward for mining Bitcoin has been cut in half.

The solution is twofold. The company needs to find ways to mine more bitcoin — and to do it more efficiently. Moreover, the Bitcoin price needs to rise, and Marathon Digital has no control over that.

Meanwhile, there’s the upcoming earnings event to consider. Again, short-term traders might be able to flip MARA stock for quick profits. On the other hand, long-term investors might easily get burned if they chase the pre-earnings rally.

A prudent approach would be to wait until Marathon Digital’s earnings event has come and gone. At least then you’ll have more data to work with, and if the results are positive, you can invest in the company with justification instead of just hope.