I think this is right.  Bitcoin, as a decentralized currency, simply can't be brought into existence as a usable currency by the standards of what we're all used to right out of the gate.  Its design ensures that that cannot be the case.  Its design practically demands it be a speculative vehicle at the get go (for who knows how long).  What's really interesting is that it's attraction as a speculative vehicle during it's growth phase is, it appears, a necessary step to becoming a decentralized currency (in the useful sense we're all used to in terms of stability, etc.).  If it weren't for its speculative attraction, how would it ever reach a valuation capable of handling lots of transactions for lots of products (from homes to candy bars) on an international scale?

Right, those are just restatements of the question under consideration.  What's interesting is that contrary to these sorts of standard formulations of why deflation is bad, bitcoin has been experiencing extreme deflation over its life, and yet bitcoin spending appears to be increasing over time, and merchant adoption appears to be increasing over time.

That's why this is interesting.  We can all read the wiki on why deflation is thought bad by the most popular economic theory.  And yet, it seems the theory's predictions may not be presenting themselves (a) at all or (b) much more weakly than the theory would suggest relative to how extreme bitcoin deflation has been.

The real interesting work has to do with substantiating all these anecdotal claims about increased spending and increased adoption.  Then if those claims are supported, explore explanations for why the theory isn't predicting well in this case.  Is it because enough time hasn't passed?  Are there other properties of bitcoin and its economy that make is sufficiently different from the types of cases deflationary theories typically apply to?  Is the theory just plain generally wrong?

Just saying, "Deflation, therefore bitcoin will fail" as you have done, and as the author of the article that sparked this thread has done, is, IMO, a failure to thoughtfully consider the issue.

I had ~150BTC in bitcoinica (not in any positions, mind you) when it went offline.  I missed the deadline at the beginning of the year to add additional information regarding my account, though I am listed on that investors list that Taslim Bhamji emailed out a year ago.  I guess what I'm getting at is...Help me understand if this is worth my time.

LOL, best laugh of the day.

I understand all of that.  The point I'm making is that that article could have been published 4 years ago, and, in fact, people did write such things 4 years ago, and 3 years ago, and 2 years ago, and last year.  And, yet, it seems, at least anecdotally, that spending has not stagnated.  What I'm suggesting is that we don't need to speculate about future values.  We already have a history of deflation and possible increased spending to explain, which runs contrary to the deflationary argument.

Works for me from East Coast US.

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.

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.

No

I was burned once.  Bitcoinica got away with 150 of my bitcoins (I understand MtGox is basically holding them hostage), and I consider myself lucky it wasn't much worse than that.  I've managed my own bitcoins in my own offline wallets ever since.  I understand that bitcoin already attracts people with high risk tolerance, but adding the risk association with MtGox historically adds...again, I just don't understand how people are tolerating that level of risk with the amounts that are sitting on Gox.

...and yet lots of people still store lots of bitcoins and other money on MtGox.  It's really incredible.  I just don't understand it.

I seem to be getting my prescience back...

Thankfully the worldwide debt based system hasn't ever resulted any significant problems due to people and businesses borrowing today to pay tomorrow.

Storing BTC value with 3rd parties is risky.  Storing BTC value with MtGox is insane.

So, FWIW, I think this guy should say something there.

Seeing the same.

Any insight on why?

LOL, Hi Joe, welcome to a discussion this community has been having since like July 2010.

What happened to gold on Friday?

That made me lol, thanks.