We'll here's the thing. Bitcoins are used in transactions. The author's theoretical problem has been discussed from the very beginning. People were raising the exact same issue in 2010 when bitcoins were trading at a nickel...and people went on and bought them and spent them.
I don't know that there's a real academically satisfying response to the complaint. On the one hand, the author raises a serious economic concern (though, he's quite late to the party in raising it): That the deflationary nature of bitcoin will contributes to the system's failure. And on the other hand, there is the following fact: People spend bitcoins.
Agreed, people obviously spend Bitcoin's but as they become more valuable, will they be spent more or less? Isn't it a fair to at least question whether the higher the value is, the less you're inclined to spend? Nancarrow makes good points as well but for the interim we mostly do still have disposable income and can hoard. I would say that is true for 95%+ of people who are buying Bitcoin's. Isn't it at least possible that spending could drop drastically as we cross the $500, $1000, $10,000 mark of Bitcoin's?
It's absolutely fair to raise the question. What I'm suggesting is that it's an open question. I think the deflationary argument against bitcoin is compelling. And, yes, it's absolutely possible that spending could drop drastically as the value goes up. But, here's a question: Has bitcoin spending
dropped drastically as the value
has gone up? What's so important about the future values of $500, $1000, and $10,000? It seems there's enough history now that we can scrape together enough data to make some preliminary judgments.
For example, the value of 1 BTC is more than 400x greater than when I bought my first bitcoins in early 2011. Has spending decreased more than 400x? Has it increased? By how much either way? If it's increased, what are the best explanations for that behavior? I've read a lot of anecdotal evidence that merchants see increased spending during rally periods. I think it'd be a worthwhile project to investigate these claims more rigorously since they offer some early empirical evidence that empirically runs contrary to the deflationary argument's theoretical claims.
Granted, it's still early. Still, I'm not aware of a deflationary currency environment of this size from which to draw empirical evidence to either substantiate or contradict an old, and widely accepted economic theory.