Bitstream is quite literally a stream of bits one after another. PCM is transported as a bitstream too.
In the context of settings on the player, setting it to bitstream tells the player not to touch the data it reads off the disc, just send it on and the receiver will decode it. The PCM (or LPCM - same thing) setting tells the player to decode and downmix DD/DTS and send the resulting 2 channel PCM to the receiver.
Either setting will work if you are playing a CD or other source that is already 2 channel PCM.
I don't think the PS3 can pass any of the new HD formats as bitstream so LPCM is probably the best setting to use.