proper place to keep userid and password for mysql

Well, I can surely see the need for it.
 Anyway, is $config['base_url'] = 'http://localhost'; the same as setting document root to /localhost? 

I didn't find document root in the CI documentation search.

I have set the index.php line to

$application_folder = '~/opt/docker-substantiator/application';
$application_folder = '../opt/docker-substantiator/application';
$application_folder = '../application';

But they all yield
our application folder path does not appear to be set correctly. Please open the following file and correct this: index.php

Where is this message coming from? Perhaps I could debug it? 

proof that an old dog can learn new tricks

What does your Dockerfile and/or docker-compose.yml look like? It sounds like you're only mounting the /app/ directory, though it's difficult to tell without seeing directly.