Can't open launcher with BTN 2

has anyone else experienced the problem?

Yes. They have - it's just if you didn't update the firmware and then you disable Bluetooth and manage to break it.

There should just be a way to reset it to factory defaults

There is. That's what BTN1+BTN2 the Install Default Apps in the app loader is, and it works great with up to date firmware (or if you don't disable Bluetooth)

Also I understood that to download firmware I still have to use Bluetooth.?

Yes, but the bootloader is always there is is 100% unaffected by Bangle.js settings - just try it.