What happened at ETHZilla?
How Convertible Funds’ Hedging Can Pressure Stocks — And What ETHZilla Investors Should Know
Structured financing—especially via convertible notes—can introduce very real pressure on a company’s stock price, even when its business fundamentals are sound. For patient, long-term investors like those in ETHZilla (ticker: ETHZ), being aware of these mechanics is key to distinguishing technical flow-driven price moves from changes in intrinsic value.
What happened at ETHZilla?
ETHZilla leverages real-world assets and brings them onto the blockchain using Ethereum Layer-2 networks for efficient transactions. Recently, the company undertook two major corporate actions: a 1-for-10 reverse stock split (i.e., every 10 old shares became 1 new share), which raises the per-share price but doesn’t alter the company’s overall value, and the issuance of $350 million of convertible notes in September 2025. The reverse was used to make the stock more institutionally investable, while the convertible issuance raised capital via debt that can later convert into equity.
Why did the stock fall after the convertible deal?
Despite the infusion of capital, the stock price dropped—and that reaction can be traced not to weak fundamentals, but to hedging mechanics linked to the convertible deal:
After the convertible issuance large volumes of call options were sold (pre-split strikes ~$3-4, post-split ~$30-40).
Funds that hold the convertible notes will often hedge by shorting the underlying stock and/or selling calls to offset exposure (a strategy known as convertible arbitrage).
If the hedging becomes aggressive, large short positions and persistent options-overhangs can apply downward pressure on the stock, even while the company’s intrinsic business remains sound. For instance, academic research finds that issuers of convertibles frequently experience negative stock returns around the issuance announcement due to shorting by arbitrageurs.
In the case of ETHZilla, the convertible-holder fund appears to have built not only a conversion hedge but also a substantial short position—leading to sustained pressure and a share price depressed well below what the company’s net-asset-value (NAV) analysis suggests.
The “squeeze” scenario—and why it matters
If ETHZilla’s price were to surge above key option strikes, market-makers and hedge-funds short the stock or sold calls would be forced to buy back shares (to cover hedges). This dynamic can trigger a rapid, gamma-driven rally—similar to past “squeeze” episodes. For investors sitting quietly, knowing that this latent upside exists (even if unlikely) is helpful.
Are ETHZilla shares undervalued?
According to your NAV estimate (~$27/share, based on Ethereum holdings + cash, minus liabilities, divided by shares outstanding), ETHZilla may trade well below its intrinsic value. It’s important to emphasize: NAV is a reference metric, not a guaranteed floor. Market price can diverge from NAV for extended periods—especially if technical flows (such as convertible hedging) dominate sentiment.
Key takeaways for investors
The pressure at play here is about flows, not fundamentals: convertible-fund hedging often creates temporary overhangs. If flows shift (say short-covering, redemption of converts, or opportunistic buybacks), the technical drag can reverse.
Fundamentals still matter: keep a close eye on the company’s operating metrics, assets, and cash flows—not just the share-price moves.
What can the company do? A well-timed large buy-back, reducing shares outstanding and shrinking borrowable stock for shorts, can meaningfully affect the hedge-fund dynamics.
As a long-term investor: view the current suppression as a potential tactical opportunity (if conviction remains) rather than a change in the value-story.
Conclusion In sum, convertible-financing and related hedging flows can create real, mechanical down-pressure on a stock—even one with robust fundamentals like ETHZilla. A savvy, patient investor can treat this as an opportunity: by distinguishing the temporary technical headwinds from the company’s underlying value, there’s a chance to benefit when the hedge-fund overhang eventually abates.
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