For those that argue that, essentially, the free market will value BTC to account for this, your missing the fact that the price can never account for certain properties of bitcoin, because whatever the price settles at, it still has those properties. Even if 1BTC is worth 1 Billion USD, a merchant will price a product in USD and in the equivalent BTC, based on exchange rate, and the BTC will still have those properties that make you value it over the USD, namely, deflationary expectations.
This makes no sense. Say we all had good reason to believe that gold would raise to $5,000/oz over two years due to deflation. The price would rapidly be bid up close to $5,000/oz today. Yes, it would still have the property that it will be worth $5,000/oz in two years, but that would no longer be any big deal.
Once the deflation is built into the present price, it will no longer deflate. The idea that everyone can expect a currency to deflate is simply not possible under any realistic situations. An expected deflation will already be priced into the market. It is not possible for a currency to deflate regardless of what its current price is -- that's like saying it is worth more than it is worth.