Bitcoin is useful for anonymous transactions. Though all transactions are recorded in the blockchain, the identities of the owners are not.
It is also fast, and cheap. To transfer bitcoin you just need an ip address/wallet (not sure of the details myself) and iit has a tiny transaction fee (to have your transactions included in the next block being mined out (it started with mining blocks minting new bitcoins, and the algorithm is slowly shifting towards less coins being minted, and more transaction fees being paid to the miners - so they still get to make money so long as the currency is being utilised...)
So you get to cut out the middle man, no banks, no credit card companies, no state (potentially no taxes), and only pay a transaction fee to the miners (the more you pay the faster your transactiongets included, but i think it is still trivial as new coons are still the primary income for miners).
So as a medium for exchange, it has advantages over the alternatives (paypal, for example). And thus there is demand.
So long as the demand and the supply keep up the value of bitcoin will be relatively stable. (Of course with large investments and high volatility in the market, the demand is currently driven by speculators... But in principle, so long as demand and supply remain stable, so should the price...)
Also look up the theft from MtGex (one of the biggest bitcoin exchanges at the time).
Afaik the main use was for illegal goods, because you could buy and sell illegal drugs online via the silk road. But i believe someone also tried to sell his house in bitcoin. Silk road has been shutdown, so i don't know what most transactions are currently based on.