You are missing one option: "None of the above."

The processing power is not wasted because the process that is called "mining" is the way by which creates the credibility of the whole Bitcoin payment system. Without that processing taking place, there would be no Bitcoin system. What is called mining is actually the process of creating a confirmed chain of blocks of transaction. By "confirmed" I mean that most part of the Bitcoin network agree to the validity of the blocks. The Bitcoins that are given to the miners are rather an incentive for the miners to keep going with this process.

If there is, nobody has found it yet (afawk). And there is a LOT of interest in cracking hashing algorithms because they are used in many sensitive applications. Quantum computing is one thing to keep an eye on though because quantum computers, who make use of the fact that electrons can be in several different states at the same time, for computing could be able to crack any hash within milliseconds. But then Bitcoin could move to other hashing algorithms that can not be cracked by quantum computers.

My thoughts: If the profit margin of mining changes slowly enough, the profit rate should stabilize pretty well. But if the margin changes apruptly, most likely for a significant loss of the XBT market value, if could take a long time until it will adjust. Especially today where a lot of ASICs are in use, the people would not know much to do with their miners otherwise so they just might decide to continue mining for quite a while, hoping for the market rates to rise again. Or they could start mining other cryptocurrencies like Litecoin or Namecoin though I guess their market rates are quite closely tied to XBT.

I think its a good way to keep the occasional spammer or one-time questioner away from this site. There is always bitcoins.stackoverflow.com for quick questions.

I like your idea but if your follow that line the money supply should not grow in proportion to the population but in proportion to the productivity which is a very different thing.

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.

Some thoughts why Bitcoins don't need a central banking system and how the deflation problem could be solved:

http://wordsinthecloud.blogspot.de/2013/04/do-bitcoins-need-central-banking-system.html