Watch out for these risks when investing in bitcoin

  • If you want to dabble in bitcoin investing, keep in mind that your investments are not protected and you will have to pay the IRS taxes on your gains.
  • Because bitcoin and other cryptocurrencies are still in their early stages, a good rule of thumb to remember is: Don't invest more than you can stand to lose.

One big question on investors' lips today is whether bitcoin is risky or not.

And the answer to that question is yes, according to financial advisor Ted Jenkin, CEO at Oxygen Financial.

Bitcoin is a peer-to-peer digital payment system. And because of that, there's no government involvement, no central authority and no FDIC insurance, Jenkin said.

That means that if you lose your money, it is difficult to recoup what you have lost.

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"If somebody actually hacks in and takes your money, there's nobody to complain to," Jenkin said.

There's also another complication bitcoin investors need to stay on top of: taxes.

If you invested $3,000 in bitcoin and sold it at $10,000, you need to report that $7,000 gain to the IRS and pay taxes on it, Jenkin said.

"If you don't, you still run yourself subject to the risk that if you get audited and somebody finds out that you did make money, you could cause yourself a larger problem down the road," Jenkin said.

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You also need to remember that bitcoin and cryptocurrencies are still in their early stages of development, Jenkin said. And these forms of payment still have not hit the mainstream. For example, you still cannot use them at major retailers, such as Walmart or Target.

Because of that, you should not have too much of your investments tied up in cryptocurrencies.

"Make sure that you diversify your portfolio, only dip your toe into this, and don't put more into it than you can actually afford to lose," Jenkin said.