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What I Learned the First Time I Lost a Million Dollars

Jeff Dorman, a CoinDesk columnist, is chief investment officer at Arca where he leads the investment committee and is responsible for portfolio sizing and risk management. He has more than 17 years of trading and asset management experience at firms including Merrill Lynch and Citadel Securities.

“Did you look both ways?”

I recently took my 7 year old son out for a bike ride and he started to cross the street without looking.  I grabbed his handlebars and shouted, “Did you look both ways?,” and he responded, “Oh, I forgot.” Fortunately, there was no traffic that day, and I was right next to him, but I explained to him that remembering to look both ways is not a luxury you can afford to forget. But looking back, I realized that I failed to remind him of that before we set out.  Foolishly, I was only focused on the rewarding experience of a family bike ride in perfect weather, and momentarily lost sight of the downside risks.

When managing outside capital, the downside risks have to be top of mind.  Even in a space like crypto with asymmetric upside potential, the investing mindset has to shift away from “how high can it go?” to “how low can it go?”  Just like my conversation with my son, risk management is not something you can ever afford to forget. 

The first time I lost a million

I was a corporate bond trader at Merrill Lynch prior to the 2008 financial crisis. Times were good on Wall Street pre-crisis. There weren’t any limits to the size of my trading book as long as I made money and nothing showed up in my risk reports that would raise red flags. The upside was a huge bonus, while the downside was simply losing my job. Trading on Wall Street was like a call option – known downside, unlimited upside.

I worked hard to understand the financials of the companies I traded, and I built a reputation in the corporate bond world as a smart credit trader. Over the course of my trading career, I made way more good investments than bad ones. Unfortunately, as a 27-year old working in a loosely managed system, I was terrible at risk management.

The first time I lost $1 million actually happened in the same week that I made $1 million for the first time. I was long the bonds of Trump Entertainment, a well known Atlantic City casino chain owned by Donald Trump. Trump was looking to sell one of the three casinos he owned and it was rumored that there was significant interest. Selling this asset would have been a credit positive for bondholders, as the cash generated from the sale would have led to a refinancing of the bonds at a price greater than where the bonds were trading. However, revenues were deteriorating rapidly in Atlantic City, especially at Trump properties. The bonds were rated “CCC,” and any standalone analysis of the Trump credit, future revenue and cash flows would have led most people to short the bonds, not own them (which many smart hedge funds did). This was the ultimate “event-driven” investment with binary outcomes.

See also: Jeff Dorman – Crypto Needs a Rational Value Investing Model

I woke up one morning to a report in the Wall Street Journal that said the Trump Marina Hotel & Casino was going to be sold, and there was a buyer willing to pay a high enough price to validate my long thesis. The bonds I owned jumped 5 pts that day to 104% of par value. I was long $32 million bonds and had just made more than $1.4 million of paper profits. Remember when I said the only thing that drew attention on the Merrill trading desk were red flags? Well, “green flags” drew just as much attention, and suddenly people were interested in what I was trading since I had booked a large gain that day. The thing I remember most about that day, though, besides some high-fives, was that a very smart, senior trader with 20-plus years of experience leaned over to me and said, “The question isn’t ‘were you right or wrong,’ the question is ‘should you have owned that many bonds in the first place?’” 

I didn’t think much of that statement at the time, because I had just made $1.4 million in my trading book, but I think about it every day since. And while I did sell some of the bonds I owned that day, I didn’t sell enough.  Sure enough, later in the week, the news broke that the Trump Casino asset sale fell through, and my bonds fell ~10 pts. I lost almost $2 million that day.

In total, over the course of the week, I only lost a marginal amount of money in my trading book. But I raised a lot of green and red flags, willingly accepted a ton of unnecessary volatility, and lost a lot of sleep… for no reason.  

Risk management in digital assets

When I first entered the digital assets industry in 2017, I met a lot of apparently intelligent people who boasted loudly about their investments. It seemed many people in blockchain figured out how to buy and sell, but it wasn’t evident that many had figured out how to manage risk. The common theme was large allocations to one or two digital assets, then sit back and watch them go up in a bull market. Many of these people even launched funds based on these phantom “track records.”

In March 2020, many young crypto investors learned hard lessons about risk management, discovering that managing risk is more than just downside price protection, and managing outside capital is more than just generating returns. Risk management includes operational due diligence on the venues you trade on, discipline with regard to who can trade, and independent oversight via risk committees designed to challenge position sizing.  

There are no winners when crypto funds shut down, but there are important takeaways. A strategy built around trading one asset (BTC), on one Exchange (Bitmex), with high leverage may not be the most appropriate way to bring investors into this asset class. And those without formal training or experience may be better off learning from those that do, as there is no shame in being an apprentice when it comes to managing other people’s money.  

See also: Jeff Dorman – Never Mind Hodlers, Crypto Needs More Opportunist Investors

Fortunately, I learned my lesson the hard way over a decade ago; a lesson that would have helped many in today’s crypto environment. I hear that senior trader’s advice from 2008 in my head every day, and apply it to every risk management decision I make. In the aftermath of that 2008 day, I even built a proprietary risk management system that was subsequently used at three hedge funds that I worked for, and we still use today at Arca. This tool is designed specifically to make sure all positions are sized according to reasonable quantitative and qualitative factors. The goal of this tool isn’t to make money, but rather, to avoid large and unnecessary losses. 

The ability to stay disciplined with risk management changed my career. I always knew I had the tools required to be a successful investor, and I’ve always been convinced that I can make smart investments, but it took years to realize that the difference between good asset managers and bad ones comes down to more than just picking good investments.  

Looking back, it’s clear that there are a ton of very smart, motivated, talented traders and investors in the world, and that is very true in crypto as well. But there just aren’t that many talented risk managers. It may only take 20 days to learn how to trade, and 20 months to learn how to analyze investments, but it takes 20 years and counting to learn how to manage risk. 

Crypto likes to disrupt… but you just can’t disrupt experience. There is no shortcut to that.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Coindesk News

BlockFi: Hacker Sim-Swapped Employee’s Phone, No Funds Were Lost

BlockFi said an attacker got hold of users’ data by compromising an employee’s phone and taking control of their phone number through a sim swap attack.

The New York-based crypto lending platform announced in a memo to users on Tuesday that a hacker – whose identity remains unknown – gained access to some of its retail marketing systems for just over an hour early on May 14.

“On May 14th, there was a data incident at BlockFi that exposed certain client account information for a brief period of time. While no information was accessed that would enable the intruder to access your account or your funds, we believe it is in the interest of transparency to share the following details with you, and all of our other clients who were potentially affected,” reads the memo, which was shared with CoinDesk.

BlockFi said the hacker accessed confidential data, such as names, dates of birth, postal addresses and activity histories. Other sensitive account information, including bank account details, social security and tax identification numbers, passport and driver’s license numbers and photo scans, were not affected in the data breach, the company said.

User funds were also not affected.

In an incident report, also published Tuesday, BlockFi said the hacker had accessed through an employee’s phone. By tricking the mobile phone operator into activating the employee’s phone number on another device, the hacker was able to access some parts of the company’s internal systems.

“A BlockFi employee’s phone number was breached and utilized by an unauthorized third party to access a portion of BlockFi’s encrypted back-office system,” the incident report reads. “The unauthorized third party was able to access BlockFi client information typically used by BlockFi for retail marketing purposes throughout the duration of this incident.”

The report adds the hacker tried, unsuccessfully, to make withdrawals of user funds, before BlockFi was finally able to remove them from the internal system.

In a statement, a BlockFi spokesperson said: “A sole intruder gained minimal access for a short period of time to select internal marketing systems. The BlockFi team immediately mitigated the impact of the breach through a number of standing policies and safeguards in place to protect client assets and data.”

“The issue has since been resolved and BlockFi’s products and services are fully operational and secure,” the spokesperson added.

The spokesperson did not specify which mobile network the employee used.

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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News NPR

The Lesson In Resilience That A Lost Boy Learned After A Snake Bit Him : Goats and Soda : NPR

Resilience. It’s the word of the hour.

Weeks into the coronavirus pandemic, many people are wondering: How do you find the strength to keep going when everything seems bleak? How do you stop thinking, “What did I do to deserve this?”

Manyang Reath Kher, a Sudanese refugee now living in the U.S., shares his moment of deepest despair — and how he pulled through.

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Malaka Gharib is an NPR editor and the author and illustrator of I Was Their American Dream: A Graphic Memoir, about being first-generation Filipino Egyptian American.

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News Popular Resistance

Trump Must Choose Between A Global Ceasefire And US’s Long Lost Wars

Trump Must Choose Between A Global Ceasefire And US’s Long Lost Wars

Trump Must Choose Between A Global Ceasefire And US’s Long Lost Wars2020-05-06PopularResistance.Org

Above photo: As of May 1, there were 7,145 cases of COVID-19 in the US military, with more falling sick every day.  Military Times.

As President Trump has complained, the U.S. does not win wars anymore. In fact, since 1945, the only 4 wars it has won were over the small neocolonial outposts of Grenada, Panama, Kuwait and Kosovo. Americans across the political spectrum refer to the wars the U.S. has launched since 2001 as “endless” or “unwinnable” wars. We know by now that there is no elusive victory around the corner that will redeem the criminal futility of the U.S.’s opportunistic decision to use military force more aggressively and illegally after the end of the Cold War and the horrific crimes of September 11th. But all wars have to end one day, so how will these wars end?  

As President Trump nears the end of his first term, he knows that at least some Americans hold him responsible for his broken promises to bring U.S. troops home and wind down Bush’s and Obama’s wars. Trump’s own day-in-day-out war-making has gone largely unreported by the subservient, tweet-baited U.S. corporate media, but Trump has dropped at least 69,000 bombs and missiles on Afghanistan, Iraq and Syria, more than either Bush or Obama did in their first terms, including in Bush’s invasions of Afghanistan and Iraq. 

Under cover of highly publicized redeployments of small numbers of troops from a few isolated bases in Syria and Iraq, Trump has actually expanded U.S. bases and deployed at least 14,000 more U.S. troops to the greater Middle East, even after the U.S. bombing and artillery campaigns that destroyed Mosul in Iraq and Raqqa in Syria ended in 2017. Under the U.S. agreement with the Taliban, Trump has finally agreed to withdraw 4,400 troops from Afghanistan by July, still leaving at least 8,600 behind to conduct airstrikes, “kill or capture” raids and an even more isolated and beleaguered military occupation.

Now a compelling call by UN Secretary General Antonio Guterres for a global ceasefire during the Covid-19 pandemic has given Trump a chance to gracefully deescalate his unwinnable wars – if indeed he really wants to. Over 70 nations have expressed their support for the ceasefire. President Macron of France claimed on April 15th that he had persuaded Trump to join other world leaders supporting a UN Security Council resolution backing the Secretary General’s call. But within days it became clear that the U.S. was opposing the resolution, insisting that its own “counterterrorism” wars must go on, and that any resolution must condemn China as the source of the pandemic, a poison pill calculated to draw a swift Chinese veto.

So Trump has so far spurned this chance to make good on his promise to bring U.S. troops home, even as his lost wars and ill-defined global military occupation expose thousands of troops to the Covid-19 virus. The U.S. Navy has been plagued by the virus: as of mid-April 40 ships had confirmed cases, affecting 1,298 sailors. Training exercises, troop movements and travel have been cancelled for U.S.-based troops and their families. The military reported 7,145 cases as of May 1, with more falling sick every day. 

The Pentagon has priority access to Covid testing, protective gear and other resources, so the catastrophic shortage of resources at civilian hospitals in New York and elsewhere are being exacerbated by shipping them all over the world to 800 military bases, many of which are already redundant, dangerous or counter-productive

AfghanistanSyria and Yemen were already suffering from the worst humanitarian crises and most compromised health systems in the world, making them exceptionally vulnerable to the pandemic. The U.S.’s defunding of the World Health Organization leaves them in even worse straits. Trump’s decision to keep U.S. troops fighting America’s long lost wars in Afghanistan and other war-zones only makes it more likely that his presidency may be tainted by indelible images of helicopters rescuing Americans from embassy rooftops. The U.S. Embassy in Baghdad was purposely and presciently built with a helipad on the ground to avoid duplicating the U.S.’s iconic humiliation in Saigon – now Ho Chi Minh City.

Meanwhile, nobody on Joe Biden’s staff seems to think the UN’s call for a global ceasefire is important enough to take a position on. While a credible accusation of sexual assault has sabotaged Biden’s main message that “I’m different from Trump,” his recent hawkish rhetoric on China likewise smacks of continuity, not contrast, with Trump’s attitudes and policies. So the UN’s call for a global ceasefire is a unique chance for Biden to gain the moral high ground and demonstrate the international leadership he likes to brag about but has yet to show off during this crisis.   

For Trump or Biden, the choice between the UN ceasefire and forcing America’s virus-imperilled troops to keep fighting its long lost wars should be a no-brainer. After 18 years of war in Afghanistan, leaked documents have shown that the Pentagon never had a real plan to defeat the Taliban. The Iraqi parliament is trying to expel U.S. forces from Iraq for the second time in 10 years, as it resists getting dragged into a U.S. war on its neighbor Iran. The U.S.’s Saudi allies have begun UN-mediated peace negotiations with the Houthis in Yemen. The U.S. is no closer to defeating its enemies in Somalia than it was in 1992Libya and Syria remain mired in civil war, 9 years after the U.S., along with its NATO and Arab monarchist allies, launched covert and proxy wars against them. The resulting chaos has spawned new wars in West Africa and a refugee crisis across three continents. And the U.S. still has no viable war plan to back up its illegal sanctions and threats against Iran or Venezuela.

The Pentagon’s latest plan to justify its obscene demands on our country’s resources is to recycle its Cold War against Russia and China. But the U.S.’s imperial or “expeditionary” military forces regularly lose their own simulated war games against formidable Russian or Chinese defense forces, while scientists warn that their new nuclear arms race has brought the world closer to Doomsday than at even the most terrifying moments of the Cold War. 

Like a movie studio that’s run out of fresh ideas, the Pentagon has plumped for the politically safe option of a sequel to “The Cold War,” its last big money-spinner before “The War on Terror.” But there is nothing remotely safe about “Cold War II.” It could be the last movie this studio ever makes – but who will be left to hold it accountable?  

Like his predecessors from Truman to Obama, Trump has been caught in the trap of America’s blind, deluded militarism. No president wants to be the one who “lost” Korea, Vietnam, Afghanistan, Iraq or any other country that has been politically sanctified with the blood of young Americans, even when the whole world knows they should not have been there in the first place. In the parallel universe of American politics, the popular myths of American power and exceptionalism that sustain the military occupation of the American mind dictate continuity and deference to the military-industrial complex as the politically safe choice, even when the results are catastrophic in the real world.

While we recognize these perverse constraints on Trump’s decision-making, we think that the confluence of the UN ceasefire call, the pandemic, anti-war public opinion, the presidential election and Trump’s glib promises to bring U.S. troops home may actually align with doing the right thing in this case.

If Trump was smart, he would seize this moment to embrace the UN’s global ceasefire with open arms; support a UN Security Council resolution to back up the ceasefire; start socially distancing U.S. troops from people trying to kill them and places where they are not welcome; and bring them home to the families and friends who love them. 

If this is the only correct choice Donald Trump ever makes as President, he will finally be able to claim that he deserves a Nobel Peace Prize more than Barack Obama did.

Medea Benjamin, co-founder of Global Exchange and CODEPINK: Women for Peace, is the author of the new book, Inside Iran: The Real History and Politics of the Islamic Republic of Iran. Her previous books include: Kingdom of the Unjust: Behind the U.S.-Saudi ConnectionDrone Warfare: Killing by Remote ControlDon’t Be Afraid Gringo: A Honduran Woman Speaks from the Heart, and (with Jodie Evans) Stop the Next War Now (Inner Ocean Action Guide). Follow her on Twitter:


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