The performances are what make this film.
Apart from the viral marketing, and people being confused as to whether it was real or not, and apart from the film psychologically messing with you...
All of that would've been rendered meaningless if the performances didn't feel real. And all three of them, especially Heather, knew how to act! They behaved and talked like real college students, and you got a good sense of each of their personalities: Heather being the annoyingly optimistic and motivated one, Josh being the laid back and somewhat douchey one, and Mike being the most level-headed and likable one.
The film allowed us to hang out with them for a good while to get to know them. So that when they start getting lost in the woods, and frustration starts to set in, we can observe how each of them react under stress. Heather, being relentlessly positive to a fault, tries to keep spirits up. Josh and Mike try working with her at first, but gradually her personality starts getting on their nerves. Josh, having a job and a girlfriend, is the most eager to get back home, and both he and Mike are annoyed with Heather constantly filming everything.
Since she brought them out there, Josh immediately starts guilt-tripping Heather for their predicament. Mike does as well, but because he kicked the map into the creek, he shares in some of the guilt. He can also see that Heather is actually very sensitive, like when Josh is laughing at her for her boots being wet, and he tries to defend her when Josh begins mocking her with her camera.
When Heather tries to defend herself, saying "it's all I have", we get a sense of why Heather is so attached to her camera. She may have had a bad family life, and since this is the 1990s and video cameras and VHS were popular, she tries to capture happy moments for herself with her friends. Josh even says to her at one point that "film is just filtered reality", which may not only be a criticism of film, but a wink to the audiences in 1999 that the movie was fooling them.
There were just so many little nuances in this film through the performances, I'm surprised no one else brings them up as the film's highlights. True credit has never really been given to the actors in this film, especially Ms. Donahue. We've all known that kid in school who got on our nerves for being aggressively friendly and optimistic, but later showed to be very sensitive when people got fed up with them. In the Blair Witch Project, that transition is drawn out over 81 minutes, and watching such a person lose all sense of confidence and enthusiasm that they try so hard to hold onto, and descend into complete hysterical panic, is quite disturbing.