Ethereum whales are dumping their ETH holdings! ETHZilla arbitrage repurchased stocks worth 40 million USD.

The Ethereum asset management company ETHZilla has sold approximately $40 million worth of Ethereum to repurchase shares. ETHZ closed up 14.5%, and as of the time of writing, it has risen another 9%, with trading prices surpassing $22.50. According to news released on Monday, the company still holds about $400 million worth of Ethereum on its balance sheet.

ETHZilla sells 40 million USD worth of Ethereum to buy back stocks

ETHZilla (formerly known as 180 Life Sciences Corp.)'s board approved a stock repurchase plan of up to $250 million in August. The core strategy of this plan is to sell the Ethereum held by the company and use the proceeds to repurchase undervalued stock in the open market. Since selling ETH on October 24, ETHZilla has repurchased approximately 600,000 shares of common stock for about $12 million.

This type of operational logic is not uncommon in traditional financial markets, but it is a relatively innovative strategy in cryptocurrency asset management companies. When the market price of company stock is significantly lower than the actual value of its held assets, management can achieve arbitrage through stock repurchase. Specifically, if ETHZ stock is trading at a 50% discount to its net asset value (NAV), then for every dollar the company spends to repurchase stock, it is effectively buying back $2 worth of Ethereum exposure for $1, which is extremely beneficial for remaining shareholders.

The company stated in a press release on Monday: “ETHZilla plans to use the remaining proceeds from its ETH sale for additional stock buybacks and intends to continue selling ETH to repurchase its shares until the net asset value discount normalizes.” This statement clarifies the company's ongoing strategy: as long as the stock price continues to trade at a significant discount, management will continue to execute the cycle of “selling Ethereum → buying back shares.”

Chairman McAndrew Rudisill stated that because ETHZ's trading price is “significantly below the net asset value,” the company will continue to repurchase shares, thereby reducing the number of outstanding common shares while increasing its net asset valuation. The mathematical logic behind this strategy is simple: assuming the company holds 100 million dollars in Ethereum, with 10 million shares outstanding, each share's net asset value should be 10 dollars. However, if the stock price is only 5 dollars, the company can repurchase 1 million shares (10% of the outstanding shares) for 5 million dollars, while only needing to sell 5 million dollars of Ethereum (5% of the assets). The remaining 9 million shares correspond to 95 million dollars in assets, raising the NAV per share to 10.56 dollars.

Stock price surged 23%, but still 80% away from the peak

The market reacted positively to the recent Ethereum sell-off repurchase action. ETHZ closed up 14.5%, and according to Google Finance, as of the time of writing, ETHZ has risen another 9%, with a trading price exceeding $22.50. The cumulative increase over two days is approximately 23%, indicating that investors recognize the management's capital allocation strategy.

However, even after experiencing this rebound, the current price is still about one-fifth of the recent high of $107, when the company first announced it would raise funds to establish an Ethereum treasury. The drop from $107 to $22.50 represents a decline of up to 79%, and this severe correction reflects the market's reassessment of the business model of the Ethereum fund management company.

Possible Reasons for the Plummet in ETHZ Stock Price:

Ethereum price drops: If the price of ETH itself falls, the stock prices of companies holding ETH will naturally be under pressure.

Management Fee Concerns: Investors may question why they should indirectly hold ETH through company stock and pay management fees instead of holding ETH directly.

Liquidity Discount: Stocks of small cryptocurrency fund management companies often trade at a discount due to poor liquidity.

Market sentiment shift: The excessive optimism during the peak of the cryptocurrency bull market is fading.

Nevertheless, the stock price of $22.50 combined with the fact that the company holds approximately $400 million in Ethereum suggests that the market valuation of ETHZ may still be significantly discounted. If the company's outstanding shares are approximately 20 million (this is a rough estimate), then the market capitalization is about $450 million, while the held Ethereum assets amount to $400 million, which does not indicate a significant discount. However, considering that the company may also have liabilities and operating costs, the actual net assets may be less than $400 million, which would require reviewing the complete financial statements to confirm.

Peter Thiel Founder Fund holds 7.5%

According to news released on Monday, the company still holds approximately $400 million in Ethereum on its balance sheet. This figure shows that despite selling $40 million for buybacks, ETHZ remains a significant institutional holder in the Ethereum space. Calculated at the current ETH price of about $3,800, $400 million is roughly equivalent to 105,000 Ether.

More notably, Peter Thiel's Founders Fund acquired a 7.5% stake in the company in August. Peter Thiel is the co-founder of PayPal, an early investor in Facebook, and the founder of Palantir Technologies, recognized as one of Silicon Valley's most successful investors. His Founders Fund focuses on investing in companies with disruptive technologies, with a portfolio that includes star companies like SpaceX, Airbnb, and Stripe.

Thiel's investment in ETHZ has multiple interpretations. First, it demonstrates the confidence of traditional tech investment giants in the long-term prospects of Ethereum. Second, Thiel may have noticed the significant discount between ETHZ's stock price and its holdings of Ether, viewing this as an opportunity to indirectly hold a large amount of ETH at a discounted price. Third, Thiel's participation could bring more institutional investor attention to ETHZ, enhancing the company's governance and market reputation.

The 7.5% stake held by the founders' fund implies an investment amount of approximately $33.75 million in ETHZ (assuming a market cap of $450 million). Considering the scale of the fund and the investment criteria, this amount indicates a substantial commitment to this investment rather than just a small trial.

Ethereum fund management companies repurchasing becomes a trend

(Source: The Block)

ETHZilla is not the only Ethereum asset management company that has approved a stock buyback program. The second largest ETH asset management company, SharpLink Gaming (SBET), has approved a stock buyback program of up to $1.5 billion to repurchase shares when its stock trading price is equal to or lower than the net asset value of its cryptocurrency holdings.

This trend reflects a common dilemma faced by Ethereum fund management companies: stock prices often trade at a significant discount. This discount phenomenon is also common in traditional Closed-End Funds, with main reasons including insufficient liquidity, management fees, and investor preference for directly holding the underlying assets rather than holding them indirectly through funds.

Value Proposition of Ethereum Fund Management Company:

Compliance: Holding ETH indirectly through a regulated listed company, suitable for institutional investors who cannot directly purchase cryptocurrency.

Convenience: Trading can be done through traditional brokerage accounts without the need to set up a cryptocurrency wallet and manage private keys.

Tax Optimization: The tax treatment in certain jurisdictions may be more favorable for stocks.

Leverage Opportunity: Leverage can be used with margin accounts, while directly holding ETH makes it difficult to obtain leverage with traditional brokers.

However, these advantages are diminishing in today's increasingly完善 cryptocurrency infrastructure. With the proliferation of compliant exchanges, the maturation of institutional-grade custody services, and the launch of Ethereum spot ETFs, the convenience of directly holding ETH or holding it through ETFs has significantly increased. This explains why stocks of companies like ETHZilla and SBET are trading at a discount.

The $1.5 billion buyback plan indicates that SharpLink Gaming's Ethereum holdings are significantly larger than ETHZilla. This large-scale buyback could have a substantial impact on the Ethereum market in the coming months, as these companies will continue to sell ETH to raise cash for stock buybacks. If multiple Ethereum fund management companies execute similar strategies simultaneously, it may create short-term pressure on the ETH price.

For Ethereum investors, this trend presents interesting arbitrage opportunities. If one believes in the long-term prospects of Ethereum, and the discounts on ETHZ or SBET stocks are substantial enough, investing in these companies' stocks may be more cost-effective than holding ETH directly. As the buyback plans are executed, the discounts may gradually narrow, providing additional returns for stock investors.