So yeah, while Bitcoin can't be inflated from within, it's still susceptible external shocks. For now I'm happy that those shocks are pushing its exchange rate UP 
This is why if LTC or any other alt-coin actually gains ground, even temporarily, all that will happen is completely undo BTC and all cryptocoin all together. One of the major, if not THE major, advancement and promises of bitcoin is that it is resistant to inflation due to the hard cap of 21million. If, it turns out, any two-bit script kiddie with 5 friends can effectively do so by creating a sperg-coin or what have you then people will be fully capable of extrapolating and realize the whole experiment is a bust.
That said, I also think this is the exact reason that any alt-coin won't gain ground. Enough people are smart enough to realize this and not fall for it.
When talking about inflation we have to keep in mind there's inflation of the money supply (well-known in advance for bitcoin) and in-/defaltion of prices. Bitcoin makes no promise about prices, it just promises a certain pre-defined behaviour of it's money supply.
Now, talking about stuff like a possible deflationary spiral does not make much sense unless bitcoin is at least a major currency. Before a substantial amount of people use bitcoin for their daily shopping and b2b is using bitcoin heavily, there can be no danger for the world economy incurred by bitcoin.
On the way there (to bitcoin becoming a major currency), there will be another interesting effect: bitcoin is actually inflating the world money supply, because bitcoin can and is being used as fiat substitute. When someone buys 1 BTC from a miner for €25, that miner will spend the €25 in the world economy. That fiat isn't gone. However let's say bitcoin is also actively being used as a currency for payments and also as a store of wealth... The buyer might buy something with his newly acquired bitcoin and the seller of the good might just keep the bitcoin or pass it on to his suppliers (clearly not the case today: he would nowadays typically have to trade it for fiat to pay his suppliers and could keep (and/or spend) his profit at most in bitcoin). Thus now we have 1 BTC and €25 both being used as money within the world economy and have effectively increased the money supply.
The ECB paper contains the related story of the Q-Coin in China:
The third aspect to examine is the interaction between the virtual currencies and the real economy.
Second Life and Bitcoin users are spread around the globe and therefore their impact should also be
interpreted globally. However, if a virtual currency scheme was to be focused on one specific
country, it could indeed have an impact on the money supply of this country. This is what happened
in China with the Chinese virtual currency scheme Q-coin, introduced by the company Tencent,
one of the leading telecom operators in the country. QQ is an instant messaging service provided by
this company that also allows virtual payments to be made with Q-coins. This currency can be
purchased by credit card or by using the remaining balance on a prepaid telephone card. The
exchange rate is fixed against the renminbi. Originally, this currency was implemented only for the
purchase of goods and services provided by Tencent. However, users started using it for person to
person (P2P) payments and some merchants also started accepting Q-coins as a means of payment.
In addition, several online games rewarded users with points that could be exchanged against
Q-coins and ultimately also against yuan in the black market. The virtual currency had evolved into
an illegal money scheme. Chinese authorities saw the amount of Q-coins traded reach several billion
yuan in one year, after rising around 20% annually. In June 2009, the Chinese authorities decided to
ban this currency for trading in real goods in order to “limit its possible impact on the real financial
system”.5 They also provided a definition of a virtual currency and stressed that they would only
allowed it to be used for purchasing the virtual goods and services provided by its issuer and not for
real goods and services.
Second Life and Bitcoin users are spread around the globe and therefore their impact should also be
interpreted globally. However, if a virtual currency scheme was to be focused on one specific
country, it could indeed have an impact on the money supply of this country. This is what happened
in China with the Chinese virtual currency scheme Q-coin, introduced by the company Tencent,
one of the leading telecom operators in the country. QQ is an instant messaging service provided by
this company that also allows virtual payments to be made with Q-coins. This currency can be
purchased by credit card or by using the remaining balance on a prepaid telephone card. The
exchange rate is fixed against the renminbi. Originally, this currency was implemented only for the
purchase of goods and services provided by Tencent. However, users started using it for person to
person (P2P) payments and some merchants also started accepting Q-coins as a means of payment.
In addition, several online games rewarded users with points that could be exchanged against
Q-coins and ultimately also against yuan in the black market. The virtual currency had evolved into
an illegal money scheme. Chinese authorities saw the amount of Q-coins traded reach several billion
yuan in one year, after rising around 20% annually. In June 2009, the Chinese authorities decided to
ban this currency for trading in real goods in order to “limit its possible impact on the real financial
system”.5 They also provided a definition of a virtual currency and stressed that they would only
allowed it to be used for purchasing the virtual goods and services provided by its issuer and not for
real goods and services.
sorry to quote so much from that paper, but here they actually make my point:
Quote
The economics literature has not yet addressed the effect of virtual currencies on real money and
monetary policy. One exception to this is a paper written by Peng and Sun (2009). These authors
argue that virtual currency schemes act as a medium of exchange in the real goods trade and,
therefore, that real GDP is affected and should be taken into account when assessing the effects of
virtual currency schemes on the real money supply. According to the authors, the impact of virtual
currencies on the real money supply depends on two aspects:
The authors argue that as the real money supply is affected by virtual currency schemes, central
banks should incorporate virtual currencies into monetary statistics in order to monitor their
volume.
The challenge that virtual currency schemes might eventually pose for the conduct of monetary
policy, in the event that these schemes manage to substantially diminish the use of central bank
sponsored currencies (replacing its roles in providing liquidity and a store of value), has also been
highlighted in a recent BIS document.7
monetary policy. One exception to this is a paper written by Peng and Sun (2009). These authors
argue that virtual currency schemes act as a medium of exchange in the real goods trade and,
therefore, that real GDP is affected and should be taken into account when assessing the effects of
virtual currency schemes on the real money supply. According to the authors, the impact of virtual
currencies on the real money supply depends on two aspects:
- a) the substitution effect of the virtual economy on the real economy. Based on a survey, they infer
that in China the total income of the real economy tends to decrease because of virtual economic
activities (e.g. people spending a lot of time in virtual games spend less time working in the real
world), thereby also affecting the volume of the monetary base. - b) the crowding-out effect of virtual currencies on real cash. As the volume of virtual currencies
increases, people hold less cash in real life. This causes a decrease in the cash/deposit ratio and,
consequently, an increase in the money multiplier.
The authors argue that as the real money supply is affected by virtual currency schemes, central
banks should incorporate virtual currencies into monetary statistics in order to monitor their
volume.
The challenge that virtual currency schemes might eventually pose for the conduct of monetary
policy, in the event that these schemes manage to substantially diminish the use of central bank
sponsored currencies (replacing its roles in providing liquidity and a store of value), has also been
highlighted in a recent BIS document.7
So I support the "whole pie theory" (I think blablabla brought it up?): All the money in the world fights for slices of the pie. So yes: if LTC becomes more valuable, it will take pieces of pie, likely mostly from the BTC piece. But since the "cryptocurrency piece of pie" will likely increase tremendously over time, I even think there would be room for another crypto-coin. However, I currently see none of them having enough advantage over bitcoin to gain substantial foothold.
;tldr: BTC sucks up value (pie) from the FIAT currencies until there is none left. The ECB says they should take that into account in their stats. LTC can try to suck on BTC.
