Let's separate "bitcoin-as-a pure speculatory play" and "bitcoin-as-a cryptocurrency". At any time T, a bitcoin is worth W on the bitcoin exchange. Volatility

Let's separate "bitcoin-as-a pure speculatory play" and "bitcoin-as-a cryptocurrency". At any time T, a bitcoin is worth W on the bitcoin exchange. Volatility means that at T+1 the bitcoin's worth might increase or decrease, but supply and demand still provide a pretty decent arbiratry price at this time T. When seller A and buyer B (who are involved in a dubious transaction) are looking for a safe way to transfer money, they can simply agree (at time T) that their 1000$ transaction can be translated to 1000/W bitcoins. It doesn't matter if 1 bitcoin = 1000$ or 1 bitcoin = 10$, what matters is that both parties agree on what bitcoin price they are doing their transaction in, and therefore how many bitcoins A is expecting from B. The transaction is then 1) Buyer buys agreed number of bitcoins so that at market price it represents the dollar amount of the transaction 2) sends over the bitcoins 3) Seller cashes out the bitcoins IMMEDIATELY, thus getting the real-market value for his "good or service" The argument as to "why would seller A want to cash out his bitcoins if deflation means they will increase in value" is besides the point here. Seller A is a drug dealer, not a bitcoin speculator. All he cares about is that receiving that money was as simple and anonymous as downloading a software client and logging in from some internet cafe somewhere. In this scenario, bitcoins are extremely valuable, and not going anywhere. I suspect that market will adjust, and at some point supply and demand (from people who actually use it for these kinds of activities) will lead to less volatile price variations - and therefore increased use on the black-market. Whether you want to profit from these activities is another question.