There will be a fixed number if Bitcoins, and people, because of human error, will accidentally lose Bitcoins every now and then.
This must mean that Bitcoin will eventually seize to exist? Or at least shrink to minimal amounts, when it shrinks to a certain level, it will no longer be useful.
Is this correct?
nope, it does not work that way, remember the rule on economics, if the supplies decreases, the price will increase, and when the supplies ran out, but the demand stays as is, in case bitcoin was lost due to inaccessible wallets, still, it is considered on the total market supplies, bitcoin cannot have a fixed number because bitcoin can be mined. and it can never be useless even when it reaches its low price, someone will buy it then the cycle continues, it is where bitcoin survive, the traffic that was created buy the buying and selling activity of the users.