The deflationary spiral theory states that if prices are expected to fall, people will choose to buy later in order to profit from the lower prices. The resulting reduction in demand will in turn cause businesses to try to stimulate demand by lowering their prices, which will make the problem worse and lead to a depression.
Although the theory is commonly used by central bankers to explain inflation, it does not always seem to work and is controversial among economists. The consumer electronics market is an example of a market where prices have continued to fall without causing a depression. Similarly, the value of Bitcoin has continued to rise while the size of the Bitcoin economy has grown significantly. Because the size of the Bitcoin economy and the value of the currency both started from zero in 2009, Bitcoin is a counterexample to the deflationary spiral theory, showing that sometimes the theory must be wrong.
Nevertheless, Bitcoin is not designed to be a deflationary currency. It is more accurate to say that Bitcoin has an inflationary tendency in its early days and becomes stable in its later days. Only when people carelessly lose their wallets and fail to back them up will the number of Bitcoins in circulation decrease. With a stable monetary base and a stable economy, the value of the currency should remain constant.
