The correct answer is option 3: the kinetic energy of the falling water is converted into heat. As the water falls from a height, it gains kinetic energy. When it impacts the bottom or the pool at the base of the waterfall, this kinetic energy is converted into heat energy. The collision between the falling water and the pool or the rocks causes friction, which generates heat. This heat leads to an increase in the temperature of the water at the bottom of the waterfall.

Option 1 is incorrect because the falling water does not directly absorb heat from the Sun. Option 2 is also incorrect because the potential energy of the water decreases as it falls, so the water at the bottom actually has less potential energy. Option 4 is irrelevant as it does not contribute to the increase in temperature at the bottom of the waterfall.