Taler isn't competing with bitcoin per se, but it's competing with a particular vision of the bitcoin network (or any blockchain) as "the future of digital payments". Lots of people are into bitcoin as a digital asset, as some kind of inflation-protecting security, etc. For these purposes, Taler is completely orthogonal and not a competitor at all.

How is bitcoin an improvement on money? Why is a standard on a physical or digital asset desirable, especially when the asset is rare. Wouldn't this unnecessarily restrict monetary policy?

Bitcoin(and by extension the rest of the cryptocurrency space) is an enabler for speculation - in the specific case of BTC, on the price action of the asset as more is mined, and on the cost of mining itself. Speculation's action - which is always crude when looking up close - has the effect of building a market where there once was nothing, and as BTC has grown crowded speculative activity has proceeded towards projects promising(if not necessarily delivering) additional features and social value.

One of the major limitations of a pure debits-and-credits system like Taler is that it has limited speculative interest. It can't be gamed for returns on investment, so it can't initiate the boom-and-bust cycle.

How Bitcoin levels of speculation desirable for a currency?

If my national currency was going up like bitcoin spending would decrease a lot. Why you'd you buy a car today when you can buy it in a month and spend 20% less? The economy would stop functioning.

And when the value of currency falls people want to spend it as fast as possible.