The main point is that it is decentralized and (ostensibly, with enough care) anonymous. This makes it ideal for illegal transactions (drugs, gambling, weapons, contract killing, child pornography). These being incredibly inelastic goods, price fluctuations will do little to hamper continued growth of the Bitcoin.
I dont buy it just like Feds apparently dont buy it either (yet); otherwise they would be already shutting it down.
While bitcoins can be used for illegal transactions, it does not mean (and never will) that 99% of transactions will be illegal, just like Feds won't shut down knife factory because some knifes were used to kill. At the end, paying for something illegal is not illegal on its own; its the act or good you paying for illegal. So this or another way, in order to sentence someone, Feds will need more proof of a comited crime, than just blunt bitcoins transactions (how about crime itself).
Forging currency is illegal even though all of the components and component activities are legal. (Paper, ink, printing, lithography.) The Feds (or any government) can shut down anything they like given the right legislation. Anything that allows end runs around currency restrictions and taxes is fair game for governments, and passing laws against it (or simpy extending existing laws) wouldn't even be unconstitutional in the US.
Did you declare all your bitcoin transactions to the IRS? You may already be in trouble...