"How can having your assets increase in value be harmful?"
Ponder the implications of bread jumping to an effective price of $25 a loaf. That can and has happened in deflationary collapses, as the reserve fraction jumps toward 100% (due to credit panic).
By assets increasing in value I was referring to currency, not the cost of commodities.
In your story, I would attribute the $25 a loaf bread to the credit panic, not the resultant of a consumers increase in purchasing power -- such as the expected deflation in BitCoins.
Ponder the implications of bread jumping to an effective price of $25 a loaf. That can and has happened in deflationary collapses, as the reserve fraction jumps toward 100% (due to credit panic).