What would the effect of a very long bear market be on the Bitcoin economy? I don't mean to be a doomsday prophet or spread FUD, but I need to know if Bitcoin (or any PoW coin) investors should be concerned about the following scenario:

Assume Bitcoin goes in a very long bearish market which makes mining unprofitable and cause many mining companies/individuals to go bankrupt. From my understanding, the difficulty of the network will still keep increasing when the "target" block is mined, regardless of the number of miners (yes?)


Bitcoin price drops too low for too long
Mining becomes even more unprofitable
More miners goes bankrupt and are forced to shutdown and sell their coins at whatever price than can get.
The massive sell off causes the price to drop even further due to the sudden over-supply (back to #1). This could cause a deadly spiral (or "depression" if you wish).


And on top of that:


New miners cannot join the network, because the difficulty is already too high and you need a substantial investment to setup a profitable mining rig.  Which less investors would be willing to risk because of the price movement.
Because more and more miners shuts down, the network will become more and more congested, expensive, less distributed (small investors will be washed out first, leaving the wealth in fewer hands), riskier (50% attack become easier) and ultimately investors might loose faith in the system.


Also from what I understand if there are eventually too few miners left, the system becomes worthless as transaction fees will be too high and too congested to make any transaction practical.

Is this scenario possible and does such a threat exist or am I missing something?

If "yes", is there a way to recover?
If "no", what would protect the system?
From my understanding, the difficulty of the network will still keep increasing when the "target" block is mined, regardless of the number of miners (yes?)


No.

The difficulty readjusts every 2016 blocks, based on the average time taken to mine the previous 2016 blocks.  If the average is less than 10 minutes, the difficulty goes up.  If greater than 10 minutes, the difficulty goes down.

The rate at which blocks are mined is, on average, proportional to the total hash rate of the entire network.  So if mining power leaves the network, then blocks will be found more slowly, and at the next readjustment, the difficulty will decrease.