This is not a problem inherent to deflationary currencies. It's also true within inflationary currency systems when the inflation rate is too high.
So we agree deflation and hyperinflation are both bad
We can agree that both high rates of deflation and high rates of inflation increase the risk of long term contracts. What is "bad" is a realtive perspective, in the context of economics. Again, bad for whom?
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At least with hyperinflation you could compensate with higher interest rates. If interest rates are higher than the inflation rate, I dont see why I wouldnt lend.
Risk. You're forgetting about risk. That's why you shouldn't lend, if inflation is high. It also matters why inflation is high. High interest rates are often a reflection of a high systemic risk. Often, not always.
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That's the real issue; not that Bitcoin is deflationary (it's not really, and won't be until at least 2100),
Currently its actually incredibly deflationary if you define deflation as price deflation.
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If you are only referring to the increase of money supply, then it wont take nearly that long for the supply rate to be exceeded by the economic growth rate. If you only look at the bitcoin economy thats obviously already the case and thats only going to get worse if you have any confidence in bitcoins adoption.
Again, worse for whom? There are alwasy two parties to every trade, buck.
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the problem is that the rate of change of the exchange value is too high for such long term contracts to be sensible. The current and past instablility is a consequence of Bitcoin's adoption rate, not any particular flaw in the system, and certainly not Bitcoin's "deflationary" nature. It's simply not a mature economic system, yet.
Volatility is another problem which does hinder its adoption but it has nothing to do with inflation or deflation: If bitcoin reward halving protocol were devised differently so it would perpetually grow by 1 or 2% per year you would still have that. I do agree volatility is mostly because its so new and its unavoidable; but its not the fundamental problem I see with it.
The voltility, relative to the exchange rate, will mute significantly as the economy grows. The exchange rates of small nations' fiat currencies are (almost) always more volitile than the exchange rate between major nations such as teh US and the Euro. And if the exchange rate of bitcoins continue to rise, it's a sign of economic growth; so if the volitility and deflationary nature does result in some breaking of that growth, so what? That too will self-correct as the economy matures. There is no such tihing as a deflationary spiral. It's only an economic theory that has no real world examples.