How to start the cave of dreams quest

The Werewolf can be killed using detailed knowledge about werewolves.

There is a book called "Beast's clothes" which will teach a lot about werewolves and the weaknesses they have.

The book will add a beastiary entry containing information on which signs, bombs, oils and strategies to use. I don't want to spoil your experience here, so I will let you find the book (for me it was in a chest in a bandit camp, seemed random). If you don't wanna find it yourself, I will add a spoiler area at the bottom of this post.

I just managed to defeat it yesterday after doubting that it was even possible.

Werewolf weaknesses (Spoiler):

Oil: Cursed Oil
Bombs: Moondust, Devil's Puffball
Signs: Igni

You should be aware of the fact that he can summon other wolves to help him. Usually he only does this once. Also, preparing some potions like Swallow for Vitality regeneration or Thunderbolt for more damage will also help you in this fight. I managed to defeat the Werewolf at Level 5. My damage output was bigger than his ability to regenerate his health. Just keep the damage coming with the weapons and utilities mentioned above and don't forget to dodge his attacks.

This fight is quite challenging if you are not prepared. After some experimenting I found the best tactic is to simply not get hit, this wraith deals too much damage in a single hit.

Before the fight drink a Wraith Decoction if you have one (it provides a Quen shield if a single blow deals more than 1/3 of your health in damage). If you have Spectre Oil apply it as well and use ThunderBolt if you have any.

Now that the fight has begun you will want to use the Yrden Sign and stand on the edge of the circle opposite to the wraith. This lures it inside the circle where it seems to become physical (the ghastly swirls around it disappear) and takes significantly more damage. Take this moment to get one or two strikes in with your silver sword but be careful to dodge (alt + direction) or roll (space + direction) out of the way of Jenny's swipe or this fight will end quickly. Repeat this, cast Yrden, lure the Wraith, land 2 hits and dodge.

At one point or another Jenny will disappear and three other wraiths appear. They are easily dispatched with one hit and you should do so as fast as possible (Jenny heals while this is happening and these wraiths can also drain you of health). As a last note, you should try to keep the fight close to the camp fire. I found that if I strayed too far I would end up with the trio of wraiths spawning in bushes or with trees and bushes between me and them. This added quite a bit of time to the total needed to kill all three, allowing more health regeneration of the target.