In a recent decision by the U.S. Securities and Exchange Commission (SEC), Bitcoin Exchange-Traded Funds (ETFs) have gained approval, allowing them to be included in retirement investment options such as 401(k)s and self-directed IRAs. However, financial experts are cautioning investors to exercise skepticism and consider selling rather than buying in light of this development.

Itzhak Ben-David, a finance professor at The Ohio State University, emphasizes that the approval of a Bitcoin ETF should not alter the cryptocurrency's intrinsic value. Ben-David explains that the dependence of Bitcoin's price on an ETF reflects the influence of speculative crowds, suggesting that the price may not accurately represent its underlying worth. As a result, he predicts that both the newly approved ETFs and Bitcoin itself are likely to experience a decline in the coming days and weeks.

Ben-David's prediction is based on a study he co-authored, titled "Competition for Attention in the ETF Space." The study highlights the common tendency among specialized ETF providers to focus on themes that garner significant investor enthusiasm. However, this strategy often leads to the overvaluation of securities within these new offerings. Historical data indicates that specialized ETFs tend to underperform broad-based ETFs and the market for at least five years after their launch.

The recent rally in Bitcoin following the SEC's decision also raises concerns about investor sentiment and potential frothiness in the market. Ben-David refers to this as a "reverse-causality channel," where the creation of new ETFs fuels further increases in Bitcoin's price. Feedback loops of this nature typically end in significant drops.

Assessing the direction of Bitcoin's future performance is challenging due to the absence of traditional indicators, such as earnings or dividends, on which analysts can base estimations of fair value. A Bitcoin fair-value model, based on Metcalfe's Law, has previously provided insights into periods of over- or undervaluation. Currently, according to this model, Bitcoin's fair value stands at approximately 25% below its current price.

Combining these factors and others, experts believe that the newly approved Bitcoin ETFs are likely to lag behind low-cost broad stock market index funds over the next five years. While investment decisions are inherently complex, the cautionary advice from financial professionals encourages investors to carefully consider the potential risks associated with Bitcoin and the ETFs now available for inclusion in retirement portfolios.