The Bitmap data type in Dragonfly is an efficient way to handle binary data by performing powerful bit-level operations on large amounts of binary states. It is stored as a string value, allowing for compact representation and manipulation. Key commands for working with bitmaps include SETBIT, GETBIT, BITCOUNT, and BITOP. Practical use cases include counting monthly user retention and managing real-time feature flags in an application. While memory usage and command complexity should be considered when dealing with large datasets, the bitmap data type offers significant advantages over regular string operations for handling binary states.