Hi, thanks for the time you dedicated writing this playthrough, it's pretty well done!
Yes, you can collect Soul Fragments from Shy Ghosts, but you can't kill them with attacks. Instead, you need to chase them down and drop an Apple Pie nearby (made with 3 wheats, 2 apples and 1 bucket of milk in an Oven).
About the limited inventory space, did you try crafting a Crate? I kinda hoped this addition would fix early inventory problems, but let me know if it's still bad as it is.
I'm aware the boss spawn killing you can be very frustrating, and although you could use a Bed to set your spawn far enough away, I guess the encounter is still too difficult. I will try to tackle these problems ASAP!