Lower the Margin on Bits
I just purchased 1500 bits ($15 to streamer) for $19.95 -- a $4.95 markup. This made me think about the amount of bit donations vs. PayPal donations I've seen over the years, and the fees associated with PayPal are much more attractive.
Bits however are very interactive and entertaining. The novelty of getting a bit badge and having your cheer posted at the top of the chat is likely a reason why people choose to pay the premium. That being said, for every person that buys bits, the other person donates on PayPal because its cheaper. If Twitch wants to maximize bit revenue, they need to lower the margin from ~20% to as low as 5-6%. For comparison, PayPal charges 3.6%. I would happily pay double the premium for the novelty and enjoyment of bits over paypal if it wasn't so ridiculously marked up.

-
ClovisSenpai commented
Bits are really interactive and entertaining, the intergration seems like a great feature, but you're right. Atm it honestly makes no sense for anyone supporting a channel to actually buy and donate bits. It makes more sense for them to buy gift subs so grow the community OR just direct donate via paypal. The badges and rewards themselves are so steep that the returns apart from the 1/100 bit badges are just simply not worth it. I havent bought or donated bits in years. Its also a bit insulting that the bit badges go up to 5 million, as if people are going to donate $50,000 worth of bits. I think for twitch to get more mileage out of it and people donating more bits and using the feature overall, it should be less steep. Otherwise there is no good reason to use bits over literally anything, any other form of supporting a channel. Bits need to be reviewed and overhauled or touched up honestly.