Idle machines and spectacular pay: the byproducts of a banner year for bitcoin miner Marathon

By most measures, 2021 was a banner year for bitcoin mining company Marathon Digital Holdings.

But with that success came two eye-grabbing byproducts: lots of bitcoin mining machines now sitting idle and an extraordinarily well-compensated former executive.  

The company’s recent results, published March 1, highlight rapid growth across most key metrics. Revenue for the fiscal year ended December 31 grew 3,353% year-on-year to $150.5 million. The company mined 3,197 bitcoin, an 846% increase.  

The bulk of Marathon’s gains is paper-based because the company hasn’t sold any bitcoin since October 2020. But most relevant metrics — including hash rate and the value of its investment fund — rose sharply. 

So did the company’s costs, however. Its direct cost of revenues in 2021 rose 381% to $33.7 million. This metric encompasses co-hosting fees, electricity, depreciation and amortization expenses of mining machines and patents, and so on. 

Excluded, though, are another $201.8 million in expenses — of which $156 million came in the form of stock-based pay (net of withholding taxes). 

The lion’s share of that went to former executive chairman Merrick Okamoto, who retired at the end of 2021. At that time, Marathon’s CEO Fred Thiel also took on the role of chairman, having already replaced Okamoto as CEO in April 2021.

In an interview with The Block, Thiel said Okamoto had decided to step down to “enjoy the fruits of his labors” — which are bountiful indeed. He also explained why Marathon has struggled to plug in tens of thousands of cutting-edge mining machines on schedule. 

Okamoto’s payday

As of December 28, 2021, Okamoto held a total of 5,486,480 Restricted Share Units (RSUs) in Marathon, according to a spokesperson. At its current share price, that equates to roughly $146 million in value.  

The tremendous pay packet stemmed from an incentive plan that was put in place in 2020. At that time, Marathon’s market capitalization was around $10 million (compared with $2.75 billion today) and the company was burdened with debt. 

“Merrick’s compensation, which is discussed in our prior 10-Qs, was performance-based. If the company reached and maintained certain market cap thresholds, he would be issued equity,” said Marathon’s spokesperson. “Due to the price of bitcoin appreciating in the second half of 2020 and Merrick’s and the rest of the team’s ability to build the business during that time frame, those thresholds were all met.”

Okamoto had been handed a new three-year contract on January 1, 2021, with the same salary and bonus as before — prior to which he had been given a “special bonus” of one million RSUs with immediate vesting.  

The new contract stipulated that he would be awarded one million RSUs if Marathon’s market capitalization topped $500 million, so long as it stayed above that level for 30 consecutive days; another one million RSUs on the same terms at a threshold of $750 million; two million RSUs priced at the lowest closing stock price in the past 30 trading days if Marathon’s market capitalization reached and stayed above $1 billion; and, finally, two million additional RSUs, on the same terms as in the previous threshold, if the firm’s market capitalization hit $2 billion. 

As for the “restricted” nature of his shares, Marathon’s spokesperson confirmed that they carry no lock-up period. Having retired, Okamoto will no longer be considered an insider from April 1, 2022, and will be free to sell his shares as he pleases. The spokesperson added that Okamoto’s incentive plan was based on Elon Musk’s at Tesla.  

However it was negotiated, the plan could hardly have been put in place at a more serendipitous time for Okamoto. 

Crypto mining stocks skyrocketed in value over the course of 2021, more or less in line with the rises in the price of bitcoin. At one point in November, Marathon’s shares reached roughly $76 — three times their current price. 

Wolfie Zhao, bitcoin mining analyst at The Block Research, said that North American miners were “undoubtedly the biggest winners” in a year that saw the Bitcoin network’s hash rate grow 18% despite a 50% plunge after China’s summer crackdown.  

“Just seven large North American mining firms produced over 22,000 BTC in 2021, twice what they generated in the year before even though the total Bitcoin block rewards halved after May 2020,” he said, adding:

“China’s crackdown contributed to an unprecedented geographic shift, but North American mining companies also timed the market well by placing large miner pre-orders at much cheaper costs in mid-2020 when the market was cool in order to fully capture BTC’s rally since late 2020.”

Idle machinery 

Another byproduct of Marathon’s tremendous growth over the course of last year is that it is now struggling to deploy massive deliveries of cutting-edge machinery. 

The company currently has more than 60% of its Antminer S-19 Pro ASIC Miners and S-19j Pro ASIC Miners — machines produced by Bitmain — sitting idle. If plugged in, with six exahashes per second (EH/s) of hash rate, these units could have been generating around 26 bitcoin a day, at the network’s current hash rate. 

A press release published in February stated that Marathon had received 93,000 machines from Bitmain, with 32,710 deployed at that time. By early March, another 7,600 had been delivered and at that point, the company had deployed 35,510 in total. 

Marathon’s strategy, distinct from its competitors, is to buy machinery and find capacity for hosting it with energy providers. Its two main partners are a data center in Hardin, Montana, and Compute North, which hosts its machines in Texas, North Dakota and Nebraska. 

Thiel said the firm uses behind-the-meter power provided by wind farms, supplemented by grid power “when the wind doesn’t blow” — a mix of renewable and non-renewable energy.

“The challenge is power generation, and the grid is designed to take energy away from the power generator to the grid, and not pump energy from the grid to the power generator facilities. And so we’ve had to break new ground,” he explained.  

In the case of a grid named ERCOT — short for the Electric Reliability Council of Texas, the organization that operates it — telemetry and engineering issues resulted in further delays for Marathon. 

“So we’ve had essentially a couple of months delay for our deployment because of that, and now it’s all starting to ramp up,” said Thiel. “We still expect to deploy the bulk of the systems by the end of Q2 as originally planned.”

For bitcoin miners, however, deployment is a constant grind. 

On December 21 last year, Marathon agreed to purchase another 78,000 “next generation” Antminer S-19 XP Miners from Bitmain. The equipment is slated to begin arriving in July — 13,000 a month until the end of the year, according to Marathon’s latest results. 

“We already have the capacity lined up for that,” said Thiel. “The breaking of new ground is being done with these first deployments, and then for everything after that, the mold’s already set.”

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