Welcome to Digital Beaumont
Spindletop, Bitcoin, and the Creation of a Crypto Boomtown
If you are a part of the world (atoms or bits) where folks talk about crypto often you’ll be familiar with several standard (and reasonable) questions and challenges regarding digital assets:
“Why does Bitcoin use so much energy?”
“It’s a solution in search of a problem.”
“What are the real uses for the blockchain?
“Crypto is all a bunch of scams.”
It’s that last one that I’ll attempt to address, or at least create a frame for further analysis around, today.
Crypto has created a “boomtown” economy around it, but unlike any boomtowns in the past, and unlike many of the other commodity driven modern iterations cropping up around the world, this one is global and always on. A new and valuable resource has been discovered, and opportunistic and enterprising individuals (good and bad) are doing everything they can to take advantage of what they think might be a golden opportunity.
To explore this idea a bit, lets travel back 121 years to a town called Beaumont, Texas.
Spindletop
After years of trying unsuccessfully to find oil in southeast Texas under a geologic structure called a salt dome, a self-educated man named Patillo Higgins recruited the help of more professional prospectors to drill a hole on a hill called Spindletop. From reading books on geology and years of painstaking research, Portillo just knew there was oil there, and was dead set on making his fortune from it. Just a little bit of the black, sticky stuff had been been found in the late years of the 19th century in a little town called Corsicana, Texas. Most of the “serious” oil to that point was being pumped out of the ground in the mountainous regions of western Pennsylvania, and being sold for lamp lighting fuel in a market dominated by Mr. Rockefeller’s Standard Oil.
Drilling at Spindletop began in the Fall of 1900, and the townspeople of sleepy Beaumont thought almost nothing of Higgins and the ragtag group of wildcatters he’d assembled. The townspeople felt they were wasting their money, and told them so. But after drilling through 880 feet of sand that had stymied previous attempts, oil began to show, producing what looked likely to be about 50 barrels per day: more than Corsicana, but less than the wells out east.
Then on January 10, 1901, the course of history changed, and the tiny town of Beaumont along with it.
A Gusher
From Daniel Yergin’s incomparable 1991 Pulitzer Prize winning tome on the history of oil: The Prize: The Epic Quest for Oil, Money & Power:
“On January 10, the memorable happened: Mud began to bubble with great force from the well. In a matter of seconds, six tons of drill pipe catapulted out of the ground and up through the derrick, knocking off the top, and breaking at the joints as the pipe shot further upward. Then the world was silent again. The drillers, who had scattered for their lives and were not sure what they had seen, or even if they had actually seen it, sneaked back to the derrick to find a terrible mess, with debris and mud, six inches deep, all over the derrick floor. As they started to clean the mess away, mud began to erupt again from the well, first with the sound of a cannon shot and then with a continuing and deafening roar. Gas stated to flow out; and then oil, green and heavy, shot up with ever-increasing force, sending rocks hundreds of feet into the air. It pushed up in and ever-more powerful stream, twice the height of the derrick itself, before cresting and falling back to the earth.” [from The Prize, by Daniel Yergin]
Such a sight had never been seen before. The amount of oil flying out of the ground dramatically eclipsed any other known amount, registering as much as 75,000 barrels per day. Spindletop was the world’s first “gusher,” and a new era, one powered by oil, was born.
‘What Followed Was Riotous.’
More from The Prize:
“What followed was riotous. The mad scramble for leases began immediately, with some plots traded again and again for ever more astounding prices. A woman garbage collector was thrilled to get $35,000 for her pig pasture. But, soon, land that had only two years before sold for less than $10 an acre now went for as much as $900,000 an acre. Much land was sold and resold on the basis of small, error-ridden maps, and with actual titles totally unclear. The town swelled with sightseers, fortune seekers, deal-makers, and oil field workers; each train disgorged new hordes drawn by the dream of instant wealth embodied in the dark gusher. One Sunday alone, excursion trains dropped off at Beaumont some 15,000 people, who tramped through the mud and slime and oil just to see this new wonder of the world. Upward of 16,000 people were said to be living in tents on the hill. Beaumont’s own population ballooned in a matter of months from 10,000 to 50,000.”
Along with the wide eyed fortune seekers swarming the tiny town, many of them bringing their families, their wives and children, came people looking to take advantage of them, by methods savory and not. Along with the tents, and shacks, and huts they cobbled together, sprang up brothels, and gambling parlors, and saloons. One historical analysis estimates that in the early months of the Spindletop boom, Beaumont drank fully half of all whiskey consumed in Texas. Murder became a regular occurrence, with at least two murders taking place every single night. The worst night yielded a bodycount of sixteen: the bodies dredged from a local river with their throats slit. Fighting - with fists, knives, and guns - was a constant presence.
And amidst all the chaos, scammers, charlatans, con artists, and crooks thrived.
From The Prize again:
“There were, of course, many more losers than winners, and there were endless frauds to make sure that money changed hands quickly. The stock salesmen, with shares of dubious value at best, were so numerous and so buy that Spindletop became known to some as ‘Swindletop.’ A fortune-teller named Madame la Monte did a brisk business telling her customers where new gushers could be found. Even better was the ‘boy with the X-ray eyes,’ who could see through the earth and find oil. Thousands of shares were bought in the company promoting the talented lad.”
Beaumont was overwhelmed by successive tiers of new arrivals. There were those looking to make an honest (or close to honest) buck by working in the mud and the filth of the oil field. They overloaded the town’s infrastructure. There wasn’t nearly enough housing, or plumbing, or roads, or tailors, or restaurants, or lawyers to serve them. There were those playing a game of speculation just above the everyman. The service providers who came to add supply of everything and anything in light of the increased demand. The mechanics and doctors who came to Beaumont made an incredible amount of money by jumping head first into the chaos and working longer and more lucrative hours than they had ever dreamed of. And most critically, for the purposes of our discussion today, a large class of folks looking to mislead and prey upon everyone else came to town and were completely free to do as they pleased once they got there. Police were almost non existent and were nearly as likely to be killed as they were to make a successful arrest. On multiple occasions, military troops had to be called in to quell the bedlam.
A Crypto Boomtown
I think crypto is in the midst of its own prolonged “Spindletop” moment. Something of real value (blockchain enabled digital assets, like Bitcoin) has been discovered, through the trail and error and toil of naive hobbyists who onlookers thought were insane (people like the Cypherpunks), and now the world has come to take their bit of the prize. But unlike a remote town in Southeastern Texas, the site of this gusher is the Internet. There’s no train to wait on. No need to slosh through mud and a constant drizzle of oil to pitch a tent and have the chance of making a little money through backbreaking toil. Now, all you need to do is open your laptop, maybe switch on a VPN, and you’re right there in Digital Beaumont.
Now, all you need to do is open your laptop, maybe switch on a VPN, and you’re right there in Digital Beaumont.
And naturally, this ease of access doesn’t just attract regular people looking to make a quick buck, but it draws out all of the old crooks, and a whole lot of new ones. Nouriel Roubini, former senior economist in the White House Council of Economic Advisors during the Clinton Administration (and noted crpto-sceptic) put it this way in 2019:
Of course, it is no surprise that an unregulated market would become the playground of con artists, criminals, and snake-oil salesmen. Crypto trading has created a multi-billion-dollar industry, comprising not just the exchanges, but also propagandists posing as journalists, opportunists talking up their own financial books to peddle “shitcoin,” and lobbyists seeking regulatory exemptions. [Project Syndicate]
And in many ways things haven’t changed for the better since 2019. This year has been a pretty remarkable one for bad things in crypto. In February it was revealed that a New York couple - 34 year old Ilya Lichtenstein, and 31 year old Heather Morgan - were behind one of the most spectacular cypto scams to date, the stealing of a fortune in Bitcoin that was worth as much as $4 billion when it was seized by the government (if you haven’t read about this case yet…READ. ABOUT. IT.) In July, the SEC sued Coinbase - the first stop for many, including yours truly, in their digital asset journey - for insider trading: claiming an employee knowingly traded assets before they were listed on the exchange. And just this month, Chainalysis, a leading blockchain analytics firm, presented data labelling October 2022 as the worst month in the worst year ever for hacking of Decentralized Finance protocols with $718 million stolen in the just the first half of the month.
Value Among the Chaos
A frank survey of the situation on the ground in Beaumont would have almost certainly yield a negative view. Far too many people died senseless deaths, all in a scramble for money. And even much of the actual oil that burst out of the ground in Beaumont yielded no real use. A great deal of it spilled on the ground and mixed with the dirt, creating a thick sticky mud that characterized the area for years. And as for the oil that was successfully barreled, there really wasn’t even a well enough developed market in place to make use of it, and much of it became almost worthless.
Yet the chaos of the Spindletop boomtown must be appraised for its lasting impact on world history and the real value that was discovered, created, and captured there. The 1901 gusher spawned the companies that would go on to become the industrial giants of Gulf Oil, Texaco, Amoco, and Exxon. Rockefeller’s Standard Oil was the world’s largest oil company by a significant margin at the time, while the world’s number two: Shell, ran by a London politician, was looking for an opportunity to cut into the advantage of their competition. Sir Marcus Samuel had the idea of using liquid oil to displace coal and power ships at sea. This new availability of oil in Texas, and the prospect of having it shipped directly to Europe made his idea possible. This idea, and many concurrent innovations, dramatically expanded the idea of what oil could be and the impact it could have on mankind, creating an entirely new industrial paradigm that we have yet to escape from.
Yet the chaos of the Spindletop boomtown must be appraised for its lasting impact on world history and the real value that was discovered, created, and captured there.
Congress and legislatures around the world are hard at work to build a set of rules that will govern this still expanding crypto boomtown. Almost universally, I think these leaders have a similar set of goals in their mind: #1: Protect everyday investors, #2: Create the most good possible. But they are coming very different perspectives, developed through diverse experiences and beliefs.
The pandemonium of the international crypto boomtown is not acceptable as it is. Too many normal people are losing their money, or are outright having it taken from them. But we must be thoughtful in the way that we go about addressing the problem. Not everyone in the space is a crook looking to swindle the next guy and get away with the cash. Some people are hard at work developing the commercial giants of the future, and some are building the infrastructure that will enable that future to thrive by experimenting with this amazing discovery of the blockchain.
Our policymakers and leaders need to act quickly and bring the law to Digital Beaumont before too many people get hurt and before everyone’s money is wasted as it seeps into the mud.