Indeed, you do raise a very valid point, you're right. The fiat doesn't simply disappear, so in that sense the fiat supply would remain the same, and with the same relative value.

When you say that the same fiat may be being used to buy bitcoins over again is also very valid point and a massive redflag. This is the sort of stuff that makes me uneasy. This process you've described is what's called money velocity. A high rate of money velocity is a major driver/early-symptom for periods of high inflation and even hyperinflation. Mike Maloney, a well known gold-bug, made this case a few months back that we were yet to see velocity picking up before inflation can really pick up and in turn make the gold price rise.

It's incredible to see that a connection between all the assets is forming. The issue is, in the face of such a massive disruption, what sort of chaos will we actually be subjected to?