Competition in the Bitcoin mining sector is intense, with Riot Platforms (RIOT 4.40%) and Marathon Digital (MARA 1.25%) emerging as the top contenders. While both are currently positioned at the forefront, there are numerous industry-specific factors that can help investors understand why one company is the actual Bitcoin (BTC 0.23%) mining leader.

Measuring production

While Marathon finished sixth in total Bitcoin mining production last year, 2023 is a different story. Currently ranked second, Marathon has mined just over 6,300 Bitcoins this year and led all miners with nearly 1,200 Bitcoins mined in July alone.

The jump in production can primarily be attributed to the company's strategy to get more miners online. Since the beginning of the year, Marathon's installed hash rate (a metric that quantifies a company's operational computing power) has more than doubled from just 11 exahashes per second (EH/s, a measure of computing power applied to mining cryptocurrencies) in January to 23 EH/s in August. This record-level production has bolstered Marathon's cache of 11,400 Bitcoins at the beginning of the year to more than 13,000 today, collectively worth $335.5 million at today's prices.

While Marathon's production has skyrocketed in 2023, Riot's operations have been more consistent over the years. Today, Riot sits in third place in total Bitcoin production for 2023 and finished 2022 ranked second. Riot's hash rate today is just shy of 11 EH/s, good enough to produce more than 4,300 Bitcoins in 2023 and add to its total reserves of almost 7,300 Bitcoins valued at around $188 million.

The bigger picture

When comparing Marathon and Riot in terms of production and total Bitcoin reserves, Marathon clearly shines. However, like in any industry, increased revenue is insignificant if margins are narrowing.

This is where Riot excels. The company has some of the lowest operational expenses of all Bitcoin miners, with an average cost per Bitcoin mined of just $8,400. Conversely, Marathon has the fifth-highest costs at just under $19,000 per Bitcoin mined. These elevated costs are impacting Marathon's gross margin, which is a measly 32.5% today and falling from 42% last year. Even though Riot's production has not increased as fast as Marathon's, Riot's balance and efficiency of the total mining process are padding profits, with gross margin currently at 70% and growing from 60% last year.

There are likely two reasons for Riot's remarkable efficiency and subsequent healthier margins. First would be Riot's strategic location in Texas. Due to the Lone Star State's unregulated electricity market, which allows consumers to sell unused energy to the grid, Riot can earn power curtailment credits to offset costs. This is especially helpful when energy costs are greater than the profits Riot would secure from mining, a scenario that occurs when the grid is under high demand or Bitcoin's price slips. When this happens, Riot can divert the energy back to the grid and still earn a profit. While Marathon has some facilities in Texas, all of Riot's operations are in the state.

Further benefiting Riot's wide margins is its lack of long-term debt. Oftentimes, miners will take on debt to finance their operations and expand capabilities; this is the path that Marathon chose to take. Subsequently, Marathon has some of the highest debt in the industry. 

Long Term Debt (Annual) data by YCharts

Astonishingly, Riot has zero long-term debt. The company's ability to rise to the top of the Bitcoin mining industry with virtually no debt is a testament to its resiliency and strategic vision. In fact, Riot's new Corsicana facility, which is currently under construction and will add up to 8 EH/s to its hash rate, is already fully funded without tapping into external financing.

The final verdict

At first glance, Marathon's record increases in production in 2023 would likely catch the attention of most investors. But with some digging and further evaluation, it becomes evident that Riot's robust financial health and industry-leading efficiency put it head and shoulders above the competition. 

In an industry where profits correlate to Bitcoin's volatile price, investors must prioritize companies built for the long haul and with proven resiliency. From this perspective, the choice between Marathon and Riot becomes abundantly clear.