All the spigots I've seen for bottling buckets use a 1" hole.
I'd think a holesaw would be best, with a pre-drilled pilot hole. I used a paddle bit on mine just fine though because I didn't have a hole saw at the time.
I'd say if the holesaw bit is less expensive that the cost of the paddle bit and a new bucket combined (in case you are unhappy with the paddle bit's performance and need a new bucket), go with the holesaw!
Edit: Oh, yeah, what NivekD said. I guess a step bit would be pretty awesome for this. I need to get some of those still