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I think you don't understand how supply and demand work. If demand stays constant while supply decreases, prices go up, not down.

In the general case yes you are right, however Bitcoin derives it's value like any currency from the ability to trade it, i.e. that other people are willing to accept it in exchange for something else. When there are so few bitcoins left in circulation that it no longer has value as a mechanism for trade it loses it's value entirely.

Take the extreme case of where there is only a single Satoshi left in circulation, at that point the currency will no longer be accepted in any transaction as it is of no use to anyone. In fact, take it one step further, what happens when all BTCs are lost?