In general, for repositories:
External link - access the file directly from its current location (so if it is modified on the original server, the new version will be accessed by the user, if the original is deleted, then the link will be broken)
Copy the file - copies the file into the Moodle file system (so it will not update any more).
In terms of 'legacy files', this translates into accessing the file via the legacy files URL, or accessing the file via the Moodle 2.x file-handling system. The 'draftfile' link is due to you looking at the link whilst you are editing the form, when you save the form, it will be accessed via a 'pluginfile' link (draft files are where files are stored during form editing, so that 'cancelling' the update, will restore all the files that were originally present). Realistically, with legacy files, I'm not sure if it makes a huge difference which version you choose (but for files that were hosted externally, it could make quite a difference, in terms of performance, continued availability of the file, making sure the file was always up to date, etc.)