Does it mean no coin hosted on the blockchain will gain mass adoption enough to bypass the users of bitcoin?
Yes, none for now, there is a unique standard bitcoin has proven in which none could compete yet with it, name it, is is fiat that you will say is now better than bitcoin or any other cryptocurrencies like Ethereum and their likes could withstand competing with bitcoin.
The government own billions of population, and by setting her face against bitcoin is a competitor, but doesn't seem to prove that they're a top bitcoin competitor without having a downward course in the process.
Government are not it's competitors, they are only taking fake rumours around about to get people discouraged while they have never succeeded in any of their attacks.
Last question please forgive me, what stops them from building a coin on the block chain that'll bypass the total sum of bitcoin users, and regulate it?
They can't, it will be centralized if they do so and the people wanted a decentralized digital currency and not the one that will subject them under centralized authorities like we've been used to with fiat.