Will a Possible Fed Pivot Boost Crypto Miner Marathon Digital (MARA)?

At first glance, the bullish narrative for cryptocurrency-mining specialist Marathon Digital (MARA) seems farfetched. Obviously tied to the fortunes of the underlying digital asset market, MARA stock likely won’t perform well if cryptos remain underwater. However, a possible pivot – or at least modulation – in monetary policy seems to have encouraged some speculators.

To be sure, conservative investors need to be extremely cautious about MARA stock. Based on its financial profile, it’s very possible that Marathon Digital represents a value trap. For instance, the company’s three-year revenue growth rate stands at a stout 72.7%. That ranks higher than over 93% of firms listed in the capital markets industry.

However, much of this enthusiasm was printed during the crypto heyday of 2021. This year, circumstances present a rather dubious backdrop. For instance, in the company’s latest second quarter of 2022 earnings report, Marathon generated revenue of $24.9 million, which slipped 15% against the year-ago period.

What’s worse, the mining enterprise posted a net loss of $191.6 million. That’s significantly lower than the loss of $108.9 million posted one year ago. Therefore, the longer-term average revenue data clouds the context in that forward projections don’t appear encouraging in the least.

Nevertheless, not all hope is lost for MARA stock. Recently, the U.S. equities sector appears to be on a roll, with the benchmark S&P 500 gaining 4.4% in the trailing five days. Turns out, the latest economic datapoints suggest that the Federal Reserve’s hawkish monetary policy is having its intended effect. Business contraction occurred, suggesting that the Fed might let off the gas in terms of future rate hikes.

Notably, blockchain traders picked up on this dynamic, leading to bullish speculation in the options market.

Big Risks on MARA Stock Point to Even Bigger Hopes

Following the conclusion of the Oct. 25 session, MARA stock ranked among the entries for unusual options activity. Specifically, two transactions stood out. First, bullish traders bid up the $18 calls with an expiration date of Nov. 11, 2022. Second, market participants targeted the $16 calls with an expiration date of Nov. 18, 2022.

For the record, MARA stock closed at $14.76 in the open market. Therefore, it must rise 21.95% to be at the money for the nearer-expiry call and must increase by 8.4% to break even with the longer-expiry option.

Regarding the $18 call, volume reached 4,805 contracts against an open interest reading of 132. The bid-ask spread as represented by the midpoint price (51 cents) came out to 13.73%, reflecting liquidity (demand) challenges.

For the $16 call, volume hit 6,440 contracts against open interest of 191. Here, the bid-ask spread came out to 3.15%, a much more reasonable margin.

Not surprisingly, the recent optimism in MARA stock clashes with broader pessimism in the options market. According to data from Barchart.com, Marathon’s put/call open interest ratio stands at 0.86. Usually, the threshold between bullish and bearish sentiment is 0.70, with figures higher than this level indicating that more traders are buying puts than calls.

However, Wall Street analysts remain shockingly optimistic about MARA stock. Three months ago, the consensus rating for Marathon was “strong buy.” In the current month, the consensus only went down a notch to “moderate buy.”

You Can’t Cheat the Macros

Adding to the sentiment for MARA stock is the conspicuous uptick in the crypto sector. At time of writing, the total market capitalization of all cryptos stands near $986 billion. One week prior, the market value was around $924.5 billion. That’s roughly a 7% increase in valuation, inspiring optimism for the blockchain mining industry.

Nevertheless, if an upside opportunity exists in this space, it’ll be arguably short lived. Fundamentally, it’s probably next to impossible to “cheat” macroeconomic dynamics.

For instance, between September 2012 and December 2020, the purchasing power of the dollar declined by slightly over 11%. Between December 2020 and September 2022, currency strength eroded to the tune of 12.2%. In other words, the inflationary pressure has been nothing short of severe during the post-pandemic new normal. Therefore, merely stepping off the hawkish monetary policy gas might not do much.

Stated differently, the Fed finds itself staring at a massive inflationary hole. So, a few months’ worth of deflationary data may not represent enough justification for the central bank to ease up. To truly get circumstances under control, it might need to “kill” inflation to bring consumer prices down to some semblance of reality.

Ultimately, then, MARA stock could still be a value trap at this juncture. Yes, some near-term data provides encouragement for the crypto-mining sector. But the fundamentals remain too ugly to ignore.

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