If nobody is willing to sell, then there is no trade. That makes a currency worthless. Bitcoin is even more vulnerable that gold in that regard, because if Bitcoin stops being used as a currency then there will be no incentive for anyone to run the Bitcoin software -- and then Bitcoin will just die.
Collapse will come when no one is willing to buy (e.g. crypto is broken or there is no way to spend/use it). As people anticipate this coming, they'll start selling to anybody who is still willing to buy. The price will drop until no one is willing to buy, at which point the value of commodity will become zero.
On the other hand, if many people are willing to buy (in expectation of future increased usefulness), then the price will go up until no one is willing to sell. At which point every holder anticipates some future benefit, cannot buy more from anybody, but has plenty of people willing to buy from him for some price. This situation will stay like that until anyone decides to "use" money by selling it (e.g. to buy a dinner because people need to eat sometimes). No collapse here.
History has shown that when people start hoarding currency, a new currency arises to replace the one being hoarded. A currency is not useful if it is not being traded -- if the benefit of saving your money outweighs the benefit of whatever you would have purchased with it, you'll save it and find something else to trade. In the case of Bitcoin, there is an even greater risk, which is that people will stop bothering to run the Bitcoin software as fewer and fewer people trade their BTC.
The problem with your argument is that it ignores the utility of the currency. A currency that nobody is willing to trade is not useful, which is harms the demand for that currency. Bitcoin's only utility is as a currency, and so without people willing to trade BTC for something else, Bitcoin is useless, which makes it worthless. Another way to put it is this: your argument only accounts for speculation, which is not the whole story.
Precious metals versus fiat currencies? Given the choice between coins made of gold and coins not made of gold, people traded coins not made of gold. Gold is not a currency for the majority of day to day transactions anywhere on Earth, despite having once seen widespread use. Even when currency was backed by gold, people did not actually trade gold; gold was (and remains) stored in vaults. Governments realized that they could issue money that contained less and less precious metals, even no precious metals at all, and there was no revolt at all, just widespread acceptance and use of the new currency.
History has shown a lot of anti-hoarding propaganda, but not a single empirical example of how it can paradoxically happen that people are buying more and more of some commodity only to have its price drop to zero. This does not sound logical to me.
Your problem is with definition of "trade" and "hoarding". If you rephrase your statements using words "buying" and "selling", then it'll be clear why you create a paradox.
When people "trade" they are doing an exchange: one buys coins for a product, another one buys product for coins. If the demand for coins grows, buyers of coins will compete between each other to offer more of their products for coins. Hence the growth of the coin price in terms of other products.
But the trade (or "hoarding") can only happen if someone is willing to sell, right? So the actual exchange (at any price) will happen only where people are selling coins.
The trade does not happen continually, it is discrete. In the night people sleep and do not trade. And when trade occurs, it is instantaneous. 100% of time money and products simply stay on someone's account.
If at some point everyone expects price to rise and nobody sells, no trade occurs. But still everybody is willing to buy at the last known price. What can we say about price without recent trade? Nothing - we only know last price from yesterday (or last week). Do coins suddenly lose all their value since nobody is trading? No, because people are still willing to buy.
When a single seller expects that the price will not grow further, but there are real products to buy for coins (since everyone is still willing to buy), he will sell his coins and establish a new price. Maybe the same as yesterday, or lower. And the market will find another price. Maybe lower, maybe higher.
Please point out logical problems in my statement before repeating that "no trade means no utility and total collapse".
"paradoxically happen that people are buying more and more of some commodity only to have its price drop to zero"
It is not that the price necessary drops to zero; it is that the commodity stops being used as currency. That is precisely what happened to gold and other precious metals -- people do not use gold coins to conduct their business anymore, not because nobody wants gold, but because there are no gold coins in circulation. Gold is not currency outside of a few niches because people just hoard it. Gold was replaced by other currencies as soon as people discovered reliable ways to prevent counterfeiting.
"If you rephrase your statements using words "buying" and "selling","
...then you wind up with the same problem. Here is a simple example for you: suppose an enormously wealthy person decided to buy all the gold in the world, and keep it locked in his cellar. What would gold be worth once everyone realized that there was none left to buy? People would eventually forget that they ever wanted gold once there was none left to buy.
Let's put it this way: Livermorium is one of the rarest materials in the universe. How much would you be willing to trade for a gram of it?
Now, with Bitcoin, things actually become simpler. Gold has industrial uses, and Lv might also. Bitcoin has no use at all, except as currency. Repeat the thought experiment: if one person bought all the BTC in the world and refused to sell any of it, what would Bitcoin be useful for? What if 100 people bought it all and refused to sell it?
"If at some point everyone expects price to rise and nobody sells, no trade occurs"
...and if a currency that is not traded has no utility. Eventually people catch on to the lack of utility. The next time you go to a gas station or vending machine, see if you can find a way to spend a gold coin.
"Do coins suddenly lose all their value since nobody is trading? No, because people are still willing to buy."
People are only willing to buy currency if the currency has utility. Nobody buys gold as currency anymore because it is not currency (again, try to use it at a vending machine; for that matter, try to find a merchant who even has a scale available to weigh gold), they buy it as an investment, and only when they have a supply of some other currency available to them.
"Please point out logical problems in my statement"
Right here:
"When a single seller expects that the price will not grow further"
1. That means the seller is not hoarding.
2. The seller has to be able to find people who have not given up on using the currency. If the volume of trade falls low enough, that will become difficult; people would have switched to a currency that is easier to trade.
1. No, it's not how the gold went out of hands of regular folks. It was threat of prison: http://twitpic.com/c0f5h5
Also, gold is expensive to transport and store, so paper receipts were used instead. But those were warehousing receipts (until the banks started issuing fake receipts), equivalent to gold. So you can't say that the gold lying in a vault does not have value: it has value because of its readiness to be taken out at any moment for a receipt.
2. You think of economic actors as static role players. They are not. When someone starts buying up gold, the price will go up because he would have to overbid everyone else who wants to buy it too. And the more gold you want to buy, the more expensive it will be until something else that you give up will become more precious for you than gold.
3. I'm not interested in Livermorium. If someone is, it's their choice. I'm also not interested much in gold at current prices and risks of storage and transportation. Some other people are. Also, some people are not interested in using Bitcoin while its market is limited and client app sucks. But I'm okay with both.
5. Define utility. When people keep bitcoin/gold/usd/eur balance, it has utility for them (otherwise they would sell). The utility is in expectation that you can sell it later, when you know better what you want to buy. There is always uncertainty in the world and people keep some cash to be able to spend it when they know how.
6. The fact that "hoarder" sells his coins is not a logical fallacy. The logical fallacy is a notion of a "hoarder" as a special category. He is just a buyer. He bought some time ago, then circumstances did change and he is willing to sell. Maybe he's selling because he needs to eat. Or travel. Or he expects the price drop. Or whatever. People change their minds and adapt.
7. You suggest that the trade "stops" when people hoard all coins and cannot buy more, right? Then, obviously they are willing to buy more, they just waiting for someone to sell. So when someone for some reason decides to sell, he will find the buyers immediately.
8. "Trade" does not exist as a fluid continuum. It is just a collection of instant exchanges in time. Trade never "stops" or "freezes". The money does not "circulate", it is always-always located on someone's balance. It never "moves". Even if a truck with gold physically "moves", the money already belongs to someone, so it does not matter where exactly the truck is. Therefore, any theory derived from existence of "circulating money" is false from the start.
