When I first heard about bitcoins, my biggest concern was that the system stops creating BTC supply at 21 million. This implies future deflation because prices are determined by the supply and demand of a currency. If supply of the currency is flat while demand is growing, you get a massive deflation. Deflation means that your BTC will buy more next year than it does this year. For example, this means that a bitcoin today can buy one apple but next year can buy two apples.
I see the problem of a deflation spirale with BTC too but in my opinion there are a couple of reasons why with BTC this will not play out:
- BTC are not a government issued currency or the only currency used in an economy and never will be. So an increased exchange rate over time e.g. in relation to the USD will not be a problem for the economy because people can always go back to their local currencies if they despite the deflationary nature of the currencies. At least as long as we don't enter a phase of hyper inflation in the USD.
- In the future, BTC will have to compete with other crypto currencies. This will indirectly decrease the demand for BTC because there will be popular crypto currencies with similar properties (GoogleCoins, iDollar ?).
- In the area of payment, current payment solutions make it possible to buy something with BTC which can be cashed in the local currency in a matter of minutes, circumventing any developments in the exchange rate.
- When the exchange rate of BTC would go up too fast, the system would regulate itself for too many market players would fear a bubble and would start with panic selling. As seen around April 8, 2013.
Though I see that the exchange rate for BTC will generally go up in the future, I think that the self energizing effect that would lead to a deflation spirale will be compensated because of the reasons state above.