What are we ALLOWED to do with bits?

Both of what you describe is basically using fake currency to buy fake currency and items. Twitch wouldn’t approve of this

Please refer to the AUP → Twitch.tv - Bits Acceptable Use

Specifically point 17:

Soliciting goods, services or digital content (including displaying certain chat messages, playing a game, being “friends,” or starting a private conversation) in exchange for Bits, or exchanging Bits for goods or services or digital content;

And 18

Soliciting Bits for goods or services or digital content (including displaying certain chat messages, playing a game, being “friends,” or starting a private conversation), or exchanging goods or services or digital content for Bits;

I of course stand to be corrected here, but bits should not be used to purchase things, they are used to tip the broadcaster