Could bitcoin be destroyed if an entity cornered the market? I know the US Government is opposed to competing currencies.  It seems that it would be a rather simple solution for them to destroy Bitcoin before it grows too much by merely buying all the currency, which would be rather feasible given today's market cap of $80M (as of July 2012), and never selling.
The exchange rate at any one point in time is determined by supply and demand at the markets.

The value of all bitcoins at the current market price is $80 million because the current market price is the point where the demand for bitcoins at a certain price meets the supply.  You are describing introducing an artificial demand that would indeed cause incredible rallies in the exchange rate and cause tremendous exchange rate volatility

While some people cash out in a rally, others are buying.  This government taking this action would be enriching speculators mostly -- certainly not the best use of the governed's tax dollars.

Even in a hypothetical scenario where this party you describe were somehow able to acquire 9.49 of the 9.5 million coins issued today, there are just about 11 million more that will be issued, so this entity would need to continue buying.  But even with just 10,000 coins remember that Bitcoin is divisible down to a Satoshi (0.0000001 BTC).  That 10K BTC gives 1,000,000,000,000 Satoshi trading units.  That allows plenty enough time to get an update out that provides for even greater divisibility.

Of course, the risk then is that those 9.49 million coins are not destroyed but find their way back onto the market, creating again huge volatility and price inflation.  That can technically be done, yes.

I don't think too many speculators are losing even a wink of sleep over it though.