Wow, an intelligent post on the economics forum! What a treat! I had to think this through for a while, so thank you for making me think. Here's my best effort at thinking through the consequences of what you're saying; I may have more to say tomorrow as I think this through a bit more.
The other big one is that deflation likely encourages hoarding at the expense of consumption, so as a businessman, you should also expect very few customers.
This is false. Deflation does not encourage hoarding. The argument that deflation encourages hoarding works just as well to argue the deflation encourages spending.
Say I hold some asset that's going to go up in value. The fact that the asset is going to go up in value means that the asset includes the right to hold that asset as it goes up in value. The more the asset is going to go up, the more the right to hold the asset as it goes up is worth today. So deflation encourages spending by increasing the present value of an asset, meaning that you can get more goods for it today than you could otherwise.
Well, first things first, this paragraph made no sense to me whatsoever, perhaps an example would help.
This is, of course, an invalid argument. But it's invalid for the same reason the argument that deflation will encourage hoarding is invalid. An asset that will be worth more in the future will be worth more today because the price today includes the present value of its expected future prices. Everyone who owns a bitcoin today also owns the right to have one bitcoin in five years. If we all agree a bitcoin will be worth X in 5 years, a bitcoin will never be worth than the present value of X in 5 years.
It's appealing to think this (and indeed, I've thought like this automatically when discounting things for inflation in the past), but here's how I think it goes wrong. It's too simplistic for two reasons: (a) you haven't accounted for individual uncertainty in calculating the net-present-value of Bitcoins 5 years from now, and (b) you haven't thought through the consequences of people having different opinions on what a bitcoin will be worth in the future.
To not complicate the discussion, let's pretend the inflation rate for the dollar will be 0 for the next 5 years. You could account for non-zero inflation, but it just muddles the larger point.
a.1) Even as an individual, I have no certainty of what the value of a Bitcoin will be 5 years from now. All I have is a feeling for the probabilities of different outcomes. For example, I may think there's a 50% chance that 1 BTC for $10 today will be worth $25 in 2016, or a 50% chance that it will be worth $0 (say, it never takes off as a currency, so people lose all interest). You might think that I'd agree to pay $12.50 today for it, but since I'm taking a risk ($12.50 in my pocket has the same net present value), I'll only agree to pay $11.00 today for it (let's say that happens to be the market price). Call the extra $1.50 compensation for sleepless nights worrying about a government on Bitcoin erasing my investment. As time goes by, the probabilities of the different outcomes become sharper. For the sake of argument, let's say that five years from now, it's clear that a Bitcoin is worth $12.50 with 100% certainty. Again for the sake of argument, let's say that everyone else went through my same thought process. Then it appears that the value of Bitcoins has gone up from $11.00 to $12.50 in the market over the five years 2011-2016, even though the net present value of a 2016 Bitcoin was constant throughout that period. This should start popping up red flags about net-present-value arguments. Uncertainty will create risk premiums for Bitcoins in the future, and right now, that uncertainty is quite high.
a.2) Uncertainty also has the effect of reducing the amount of money in the market. Say I have $1,000,000 to invest, and will need $250,000 for a minimal retirement five years from now, and $500,000 for a comfortable retirement. Hence, assuming every other financial obligation is covered (again, sake of argument), I can *definitely* invest at least $500,000 and will invest *at most* $750,000. If there is no uncertainty, I'll invest the $750,000. If there's huge uncertainty, then I'll invest only marginally above $500,000. Why does this matter? In a market as small as the currency exchanges, there may not be enough money on the table to bid up the price to what you'd expect from net-present-value arguments (with or without accounting for a risk premium). In other words, if you're a buyer, you may see an offer from someone to sell that's below what you'd be willing to pay, but you may not be certain enough of its value that you're willing to risk losing your money. So you don't buy, and the market price is not pushed up. That's a second mechanism, especially applicable for the small market size of the exchanges, by which uncertainty will weigh on the present price of a Bitcoin without changing its net present value, beyond just a risk premium.
b) Getting back to deflation, here's what goes wrong. Deflation means that prices for things 40 years from now will be lower than they are today*. We do agree on this, don't we? Now, if you have all the time in the world, then you can calculate the net present value of your bitcoins today according to just how quickly you think they'll deflate. Let's say that that's how you decide how much to save for retirement. However, not everyone can wait that long. A miner may need to sell some of his Bitcoins soon to pay his electricity bill, even though he knows that holding those coins, they'd buy more electricity in the future. Or maybe Satoshi's medically uninsured sister has a heart attack and needs to pay for hospital attention tonight, not in 40 years. To both people, Bitcoins in the future are worthless, they need to sell them now. So the amount they'll be willing to sell them for will be less than what they (and everyone else) think they're worth if they could wait. If the exchange markets were deep, the difference between the two quantities might be as small as the trade commission, but at their current shallow depth, it's probably more. You buy them and since you have no reason to sell them, you keep them for a long long time: you're in no hurry to spend them, and at the price that you're demanding, nobody's buying anyway. You might want to invest them somewhere, but as businessman BitQuestr points out, few businessmen want to take out loans and give you interest in a deflationary world, so your investment opportunities are few and far between. You're certainly not going to give out negative-interest loans (why on earth would you do that?). Maybe you're willing to take a risk on your own, but you don't have to: in a deflationary world, you're guaranteed not to lose purchasing power, and this is your retirement after all. By taking those Bitcoins out of circulation, now there are fewer Bitcoins chasing the same goods, so prices go down. Everyone's Bitcoins are suddenly a bit more valuable (to those who have them), so it's a bit more tempting than before to not spend these things if you can afford to wait.
Sooner or later, most bitcoins in quick circulation will end up being captured by someone who can sit on them as long as they need to. Maybe not in the first transaction, maybe not in the second, but once they land in one of these people's wallets, they're gone for a *long* time. In other words, from your point of view, you might see lots of Bitcoins flowing through your account, but from a Bitcoin's point of view, they zap and zap between a few accounts before landing on a retirement stash and staying put for 40 years.
In an inflationary setting, removing money from circulation like that, with the concomitant decrease in economic activity, is punished by eroding the value of that money. If you want to stay ahead of inflation, you *have* to invest the money somewhere, which keeps it moving. When money is flowing in one direction, work is flowing in the opposite direction, and that work is what we actually care about in the real world. For better or for worse, most people are not entrepreneurial, and if you tell them that if they keep their money under the mattress, all will be well, that's exactly what they'll do. If you want think of profit as the carrot for investing, inflation is the stick.
* Be creative: imagine what food will cost compared to now if 9 billion people have to eat every day, and everyone demands their wallet balance to always be at least a day's worth of expenses. hint: that's 0.002 BTC / person under complete equality and assuming each and every Bitcoin changes hands daily. For comparison, the equivalent measure for dollars is about half a year, and for BTC now [discounting the "volume" generated by change transactions], about
the same [sorry about that glitch].