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Should You Invest in Bitcoin? Here’s What to Know Before Diving In

The explosive surge in Bitcoin’s value following Donald Trump’s re-election has captivated investors worldwide, rewarding early adopters with substantial gains. The cryptocurrency jumped nearly 8% in early trading the day after Election Day, surpassing $75,000 and shattering its previous record set in March.

This rally has reignited interest among newcomers eager to jump into the cryptocurrency market. However, while the potential for high returns is enticing, the risks associated with digital assets remain significant. 

Cryptocurrencies are notoriously volatile, with prices capable of swinging dramatically in short periods. Meanwhile, the IRS has intensified its oversight of digital assets, imposing stricter reporting requirements to ensure crypto transactions are properly taxed.

If you’re considering investing in Bitcoin, a cautious and well-informed approach is essential. By understanding the risks, tax implications, and security challenges, you can decide whether cryptocurrency aligns with your goals and overall financial plan.

Bitcoin Basics

Bitcoin and other cryptocurrencies mark a fundamental shift in how digital value is transferred and stored. Built on blockchain technology—a decentralized ledger that records transactions across a vast network of computers—these digital assets eliminate the need for traditional financial intermediaries. This distributed system enhances transparency, security, and trust through advanced cryptographic protocols.

Since its launch in 2009, Bitcoin has remained the largest and most widely recognized cryptocurrency by market capitalization. With a fixed supply of 21 million coins and a track record of uninterrupted operation, it has earned the reputation of “digital gold” among investors and institutions. Its resilience and scarcity continue to drive its appeal as a hedge against inflation and economic uncertainty.

Beyond Bitcoin, other cryptocurrencies serve distinct purposes. For instance, Ethereum powers smart contracts and decentralized applications, Ripple streamlines cross-border payments with speed and low costs, and Cardano prioritizes environmental sustainability through its proof-of-stake consensus mechanism.

While many alternatives boast faster transactions and lower fees than Bitcoin, they often involve trade-offs in security or decentralization. Understanding these key differences is crucial for making informed investment decisions.

Managing the Risks of Investing in Bitcoin

Investing in Bitcoin and other cryptocurrencies requires more than just basic knowledge—it demands a strategic approach to managing key risks, including volatility, security, insurance, and liquidity.

  • Price Volatility. Bitcoin’s extreme price swings can lead to both massive gains and steep losses. Bitcoin’s value plummeted from its then-all-time high of $69,000 in November 2021 to just below $17,000 one year later. While volatility creates opportunities, it also increases the risk of sudden downturns.
  • Security & Custody Options. Protecting your cryptocurrency is critical, as digital assets are prime targets for hackers. Cryptocurrency exchanges offer convenient trading and storage but can be vulnerable to breaches. Digital wallets provide greater control; hot wallets (online) enable quick access but carry higher security risks, while cold storage (offline) offers maximum security against cyber threats.
  • Insurance Considerations. Most traditional insurance providers exclude crypto, making specialized coverage necessary. Some exchanges provide limited coverage against theft, but policies often have exclusions and caps.
  • Market Liquidity & Trade Execution. Liquidity impacts your ability to buy or sell assets efficiently. Established exchanges generally offer deep liquidity for major cryptocurrencies like Bitcoin. However, liquidity can dry up during periods of market turmoil, leading to price slippage and difficulty exiting positions.

Understanding these risks—and how to mitigate them—can help you make more informed decisions about holding and trading digital assets.

Understanding the Tax Implications

As cryptocurrency adoption grows, so does IRS oversight. That means if you trade, sell, or even use Bitcoin for purchases, you may owe taxes—and the IRS is making sure it collects every dollar.

Since 2019, taxpayers have been required to disclose whether they received, sold, or otherwise disposed of digital assets by checking a box on their tax return. However, crypto investors—especially those with complex transactions—are facing increased scrutiny as the IRS cracks down on cryptocurrency tax compliance.  

For tax purposes, the IRS treats cryptocurrency as property, not currency. This means that gains and losses from buying, selling, or using crypto follow the same tax rules as stocks:

  • Capital Gains Taxes. If you sell Bitcoin for a profit, your net gain is taxed as either short-term (if held for less than a year) or long-term (if held for over a year).
  • Taxable Transactions. Using Bitcoin to buy goods or services—whether it’s a car, a cup of coffee, or a high-priced art installation—creates a taxable event. The IRS considers it a sale, meaning you must report any capital gain or loss.

The upside of this tax treatment is that losses can also be harvested to offset gains. In other words, if Bitcoin’s price drops, you can use those losses to reduce your taxable income. This strategy, known as tax-loss harvesting, can help lower your overall tax liability.

Ultimately, if you trade or use Bitcoin, understanding the tax implications and keeping accurate records is essential. Failing to report transactions properly could lead to audits, penalties, or even criminal investigations.

New Reporting Rules for 2025 and Beyond

Starting with the 2025 tax year, brokers will be required to report crypto sales to the IRS using a new form, Form 1099-DA, which will be sent to both taxpayers and the IRS in early 2026. By 2026, brokers must also include the cost basis—the original purchase price—on these forms, making it even easier for the IRS to track and verify gains.

Previously, crypto investors largely had to self-report their gains and losses, leaving room for discrepancies or misreporting. Now, with brokers providing detailed records, the IRS will be able to cross-check tax filings more efficiently, increasing the likelihood of audits and penalties for non-compliance.

For Bitcoin investors, this underscores the importance of:

  • Keeping meticulous records. While brokers will report sale proceeds and cost basis, investors must still track details like transfers between wallets, purchases made with crypto, and other taxable events.
  • Understanding tax obligations. Even if you don’t sell your holdings, using Bitcoin for purchases or earning rewards through staking or mining can create taxable events.
  • Reporting accurately. Since the IRS will have access to broker-reported data, discrepancies between an investor’s tax return and their 1099-DA could trigger audits or penalties.

Should You Invest in Bitcoin?

Bitcoin and other digital assets offer the potential for substantial gains, but they also come with significant risks. While cryptocurrency has gained mainstream attention, it remains a highly speculative investment. Prices can swing dramatically, regulatory uncertainty persists, and security concerns are ever-present. Because of these factors, it’s wise to invest only what you’re willing to lose. 

If you're considering adding Bitcoin to your portfolio, take the time to weigh the pros and cons in the context of your long-term financial goals. Does it align with your risk tolerance? How does it fit within your broader investment strategy? These are critical questions to answer before diving in. 

At Kukui Tree Capital Management, our mission is to support our clients at every stage of their financial journey, empowering them to achieve financial prosperity through comprehensive, tax-aware wealth management. If you’re looking for personalized financial planning and investment guidance, we’re here to help. Contact us today to schedule a “Get Acquainted” Meeting and see if we’re the right fit for you.