A similar question can be asked about USD: why would you ever save it instead of spending it immediately, since it's only going to lose value over time due to inflation?
Of course, the difference right now is that the deflation rate in bitcoin is much higher than the inflation rate in USD. But clearly, if bitcoin ever becomes a major currency and the deflation levels off, there will be plenty of motivation to spend bitcoins, the same way there is currently plenty of motivation to save USD.
The answer to this question lies at the heart of why economists generally believe a little inflation is better than no inflation nowadays. That little bit of inflation makes it more attractive to invest money in things that increase one's ability to generate money in the future instead of just stuffing it under a mattress. That makes the economy as a whole more vigorous, which means everyone tends to get more wealthy in the long run.
As for deflation in Bitcoin: Since the total number of BTC that can ever exist is asymptotically bounded, but potential economic productivity of a population of humans isn't (as far as we know), there's really only a few scenarios where BTC deflation might level off, and arguably all of them fall under the category of "economic crisis".
Just like monetary policy attempts to set inflation at such a rate (~1%) that it isn't irrational to save, but it is slightly more rational to spend.
I think, though, that if everyone agreed, BitCoin could eventually change to borrow some concepts from PPCoin, and restart the production of currency, once it reached a plateau of adoption. It isn't impossible to change the current production limits - just difficult. At that point BitCoin would probably splinter into two currencies, one which has a deflationary monetary policy and one which has an inflationary one.
At that point - is it still a libertarian currency? We've just traded one governing body - the US govt - for another - the BitCoin Foundation.
Except for relatively small amounts for liquidity for known or potential immediate needs, it doesn't make sense to hold US dollars (or any other modern fiat currency), it makes a lot more sense to invest them in productive assets which can be converted easily back to US dollars (or other fiat currency) when necessary.
This is not an accidental feature of modern fiat currency, its pretty much the whole point of the transition from commodity-based (e.g., gold standard) to fiat currency -- so that broad downturns don't have a dangerous positive feedback effect where poor investment market conditions lead to currency being a more attractive place to hold money than the investment markets, which leads to even poorer performance in the investment markets and even more people pulling money out of those markets and into currency, etc.
> But clearly, if bitcoin ever becomes a major currency and the deflation levels off [...]
Please explain how increasing interest in using bitcoin is going to cause the price increase relative to other currencies or goods to slow down.
> [...] there will be plenty of motivation to spend bitcoins, the same way there is currently plenty of motivation to save USD.
What motivation to save USD?
Seriously? How about buying a house? Buying a car? Going to college? Going on vacation? ... Most people cannot save up enough for these things overnight, and they aren't going to put their downpayment savings fund into stocks because it's not worth the risk of losing it for them.
In all those cases, saving USD as dollars is generally a suboptimal idea (unless its over a particularly short term, but that gets back to the short-term liquidity, not long-term investment, case.)
Using the dollars to buy investments that are expected to be worth more when converted back to cash is what you usually want to do.
Unstable currencies you generally need to convert to a more stable currency immediately, if you don't want to be subject to the sudden swings in value.
Yes, I agree and stated as such in my post.
My point is that I don't think you're pointing out a fundamental flaw in bitcoin. Deflation in a currency is not a deal breaker. Bitcoin is volatile right now because it is so young. People are predicting it will reach a huge market capitalization, which would necessarily entail a huge USD price per bitcoin because there are so incredibly few bitcoins in comparison to USD. Anytime something is increasing in value there will be considerable gambling and speculation to come along with it as random people jump on and off the train repeatedly.
What bitcoin really needs is a unique and innovative service which could not exist without it. This would encourage people to hold a small balance in bitcoin which they would be willing to spend in order to enable participation in this service not otherwise possible. As the currency stabilizes and more and more use cases emerge, people will slowly but steadily become more comfortable holding larger balances in bitcoin.
Its pretty much a deal breaker in the use of currency as a the general medium of exchange and pricing. Its not a deal breaker in its use as a store of value, obviously, but that's more about being an investment vehicle than a currency.
> As the currency stabilizes and more and more use cases emerge
What I'm missing here is any explanation of why we should expect bitcoin volatility to stabilize.
More than that it loses value predictably enough, with an active financial system around it to make and hedge out those predictions for you.
