The latter. I'd rather see social laws I don't like enacted in each individual state legislature than social laws I like forced on the whole nation by federal judges overstepping their bounds. I often wonder the same thing about conservatives. Would they rather have abortion law decided by the states, or have abortion banned nationwide by the Supreme Court waking up one day and suddenly saying it's against the Constitution? I'm a pro-life libertarian, and would prefer the issue decided in state legislatures where it belongs. And if it was to do done nationwide, it would require a Constitutional amendment.
The latter.
Wrong. This question is a matter of tactics and strategy, and thereby has nothing to do with what libertarians think. There are libertarians and Libertarians on both sides of this question.