You'll need to play around with the setting, but you're essentially controlling the cool side temp. Play around with the setting until you get a desirable temp on your warm side. It will take time - could be a day or two.
Regular bit works. No sealant required.
I use reptichip. For me it's usually very high after changing out the substrate and it takes several days for the humidity to come down. Not sure why yours would be so high with newspaper substrate. Your only water source should be the water. Make sure the water is not over any of your heat sources to reduce the amount of evaporation you're getting.