Rather, it has to do with the fact that constantly down-shifting prices cause people not to buy nearly as often as they would if prices were stable or slightly inflationary. As a result of that, the economy slows down (sometimes dramatically).
A lot of this logic is circular - the value will continue to rise because people will keep investing because the value will keep rising, etc.
Not necessarily.
The prospect that it's not a currency is what makes it attractive to hoarders. Hoarders/investors don't want Bitcoin to be a viable currency; they want it to be an investment commodity. And that's the crucial problem with Bitcoin: its use as a currency, and its use as an investment, are fundamentally at odds with one another. At any given time, it makes sense to be either buying/selling (hoarding) or buying/spending (transacting); at no point in time does it make sense to be doing both.
Transactors essentially believe that the value of Bitcoins will converge around a stable mean, thereby facilitating the currency's use for transactions. Hoarders believe the opposite: that the value will either be totally volatile (with lots of peaks and valleys against which to speculate), or that it will steadily climb.
Finally, we should distinguish between "selling" and "spending." A hoarder who wants out of the market will not spend his hoard; he'll sell it. A transactor also buys and "sells" Bitcoins, but in his case, "selling" involves spending them on goods or services -- not converting them back to dollars. This is a subtle, but crucial distinction. Both users buy into the market, but they exit the market differently and with different outcomes. And both will only be able to exit the market if there's liquidity in the form of willing new buyers or willing acceptors of BTC in exchange for goods and services. Each of those two outlets has a different liquidity dynamic, too.
(Sorry for the tl;dr)
Bitcoin will not be a good investment unless it's a currency. It has no other uses besides as currency. It's not a precious metal with industrial or ornamental uses for example. It's an abstract piece of data that could be useful in trade.
" Both users buy into the market, but they exit the market differently and with different outcomes. And both will only be able to exit the market if there's liquidity in the form of willing new buyers or willing acceptors of BTC in exchange for goods and services. Each of those two outlets has a different liquidity dynamic, too."
An investor who believes bitcoins will drop in value has the option of selling it or trading it for a good/service. Both accomplish the goal of getting out of a depreciating asset.
But if I as an individual consumer feel that bitcoin won't become a currency, why would I even be converting my money into bitcoin in the first place?
Whether or not it's an asset worthy of investing in is a separate question. (I'd argue that it isn't, but that's a separate issue from the characteristics that make it a bad currency).
If you want intrinsic value, you're probably better off investing in good quality rifles.
Though I would suggest that you would have to time your entry into the quality rifle investment market well to avoid getting hit by a speculative markup caused by people's expectations of their future intrinsic value.
In other words, deflation makes financing any risky enterprise much harder, so only the mostly highly profitable projects succeed. This makes sense, because in a deflationary environment just holding a pile of cash is a profitable endeavour.
Lots of people that scratch the surface of Austrian Economics immediately start shouting the ills of inflation and such.
Most "hardcore" Austrians I know would like a currency that's supply grew with economic growth. Economy grows by x measure then so does the currency, to keep it stable.
I guess the problem we're having is that the Fed's mandate is to keep unemployment low, not to expand the currency as the population expands.
I really don't understand how a currency supply is supposed to track growth, when one of the means of controlling currency expansion, the discount rate, can actually stimulate growth sometimes, right?
“By means of those operations [inflating the coinage], the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.”
It follows, of course, that deflating the currency is favorable to the creditor and ruinous to the debtor; although I can't find where Smith says that, I think he does. In a sense it's worse: the creditor's losses in inflation are limited to the amount she originally lent.
With inflation you get the reverse effect: people are incentivized to take on debt to spend.
But if you're going to use it to generate value, you should buy it as soon as your expectation for the marginal value it will generate is greater than the price of the CPU.
It seems to me the real problem of deflation is that debts get harder to pay off, not that people put off their purchases. But the "deflationary spiral" of delayed purchases is what people keep talking about, and I haven't heard a good reason why the tech industry is uniquely exempt from that.
Also, there are several periods in American history when we had modest deflation and a booming economy. The Roaring Twenties was one. How did that happen?
If computers get cheaper while the average consumer’s disposable income stays constant, then people will just buy fancier computers, or spend less on computers and use their savings to buy more of other things, or be grateful that the cheaper computers make up for rising prices in other things they want (e.g., health care).
If the average price of everything goes down, then the average consumer’s disposable income must eventually decrease; to make up for the lost income, employers will have to either cut wages or lay off workers.
PS: The Roaring Twenties were not always so roaring. There was a depression in 1920–21, and according to the helpful St. Louis Fed graphs, there were two other recessions between 1921 and 1929.