Yikes, are you really only allowed to use "donate" buttons if you're a nonprofit? I use them as a "tip jar" on my blog. What's the options for for-profit when you're giving money for nothing in particular?
You should be fine. Paypal explicitly allows the donate button for tips and things, even for non-non-profits (is that a word?).
The root issue here as far as I can tell is that regretsy is promising some kind of action (in this case buying a "mystery gift" for an unknown family) and Paypal has no way to verify that this is actually happening.
You are fine as long as you don't explicitly promise something. There's no way to claim you are running a fraudulent service if the money is out of goodwill for no purpose. There will be very few chargebacks to Paypal that claim "I gave jfruh a tip for nothing in particular, and he used it for something in particular."
Elsewhere[1], saurik says he got some flak for using the "donate" button without being a non-profit. He suggests that changing the wording away from "donate" ("help out", "contribute to", "support" may all be ideas) solved the problem.
This was probably a bit rhetorical but have you contacted Paypal to ask? Maybe they could help since some of the policy seems a bit grey. These bigger Paypal stories come up every 6 months or so. I have my own issues with them and certainly am no cheerleader but I do wonder if these groups get clarification before they start their campaigns. I would guess they might not have followed some policy/regulation correctly which gets them shutdown, especially if they are a large, worldly popular website that takes donations.
Bitcoin people are pretty eager to donate, because they want to support the currency. I developed a very small web site (https://cryptedmemo.com/), and have already received almost 2BTC donations. The site isn't even used that much.
I did /not/ downvote you (and still haven't), but honestly you may as well be suggesting he look into accepting contributions of ferrel camels on his website: 99.99% of people in the position to give you money at all are going to have bank accounts and cards, and are likely to have no clue how to even obtain bitcoin, much less actually own any; it simply isn't a realistic "option".
You make a fair enough point, the market size of bitcoin users is still very small. However, the technology it provides is real, and IMO, a valid solution to this problem. (even if it's not the only solution; it's not uncommon to accept multiple payment methods.)
Those that want to donate with bitcoin can easily google how to buy it, and will discover it's easier than ever to acquire. (in some cases, using paypal!)
