Still useless from the PoV of this argument until you get to the point where you can buy stuff you need directly in crypto without conversion to fiat. We're a long way from that now, and the closest practical workaround (bitcoin to gift cards to stuff) goes away if the government gets hostile.

The government doesn't have to make it impossible for cypherpunks and superhackers to use bitcoin, it just has to scare normal people. That's easily done with a few laws and some gratuitous enforcement, e.g., throw a few thousand people in jail for tax evasion, watch how long it takes for these casual hodlers to liquidate. That's 90% of the battle won, and 90% will probably be enough.