Donate lets you give your bits to other people. Think of it like saying "Hey, good job."
Bits go up whenever you post, except for in Spam and General Discussion. Mine never go up, because I am a mod. They don't go down either though
Right now, bits are pretty useless, except for to buy name effects (check out the store link at the top). Then again, everyone here uses firefox, so name effects don't really work.