Economy cannot reasonably work when there is constant deflation. No one is motivated to invest and take risks.
How can we know without trying? We have never had an economy where the main currency is in constant deflation.
The reason people invest is that they benefit more from investing than from not investing.
With Bitcoin at the moment, this is not the case. As the value of Bitcoins keeps going up, there are very few things I could do with a Bitcoin that are better than holding it.