By that logic any tradable thing can be a 'medium of exchange'. Sure, people will hold a stable currency when their own is sinking, but deliberately designing a currency for deflation is stupid.
I understand your point, but I'm not sure I agree that being deflationary or being primarily used as an investment precludes it from being used as a medium of exchange.
I do think there are some aspects of bitcoin that limit its use as a medium of exchange (transaction times, current lack of stability), but I don't think its the deflationary part.
Well in a sense it's quite freudian: you gotta feel the (unrealised value of the) bitcoin leaving you for it to be universally recognised as "having value"
