Point 1) "Thanks, ..." and "Thank you, ..." are both correct translations of "Danke, ..." German does not have different register versions for "Danke" (eg. polite or colloquial) like English does.
Point 2) In German, just as many other languages, Present Tense is used for many Future and Decision situations, whereas in English the "will" conjugation is used (eg. "I'll see him tomorrow", in German is, literally, "I see him tomorrow")
Point 3) In conversational English, the verbs "to eat" and "to drink" are used for general statements (eg. "I eat whenever I have time to...", "I drink a lot of water throughout the day") whereas "to have" is used for specific statements (eg. when offered a drink or meal, it's more natural to answer, "I'll have tea..." or "I'll have the chicken curry...", both with the will conjugation to express Decision and Future Tense)
Therefore, there are a few possibilities for this translation. A) Thanks and Thank you are both correct; B) supposing you politely declining a different drink (eg. alcohol), "Thanks, I'm drinking water"; C) supposing you are thanking and choosing from offered drinking possibilities (eg. water, juice or coffee, etc.), "Thanks, I'll have water"...); D) other variations are possible, of course.
Ok. So this is based on Verb Conjugation. I understand that -e (trinke) is used when its an "Ich" who is drinking or who drinks water.
My question is about the continuous verb i know (from other questions, that german does not have a -ing verb), But is it up to the context to of the sentance to figure out if the person is drinking or drinks water?
Like he is drinking water? or He drinks water? Is this just something that is lost in translation from English to german?
I understand that trinke, trinkt, trinkst, trinken are all the same meaning, but i am curious about the translation portion of it. (lost in translation).
It's a pronoun, not a noun. Pronouns are not capitalised except at the beginning of a sentence. The only pronouns that are capitalised are the formal you and the formal your.
Based on the notes in the tips (Normalerweise, trinke ich Wasser) that the verb should always be position 2, shouldn't it be 'Danke, trinke ich Wasser' instead of 'Danke, ich trinke Wasser'?
No. "The adverb "normalerweise" is part of the clause, but "Danke" is a separate clause. You might as well use a period instead of a comma.
Also note that, in German, adverbials are not separated from the rest of the sentence. It's "Normalerweise trinke ich Wasser", not "Normalerweise, trinke ich Wasser".