First you have an association of anything bad with excrements. This is cross-linguistically fairly common, and really old. To the point that I can’t help but quote Martial’s Epigrams, Liber III, Epigram 17 for 1st century Latin:

Circumlata diu mensis scribilita secundis urebat nimio saeva calore manus; sed magis ardebat Sabidi gula: protinus ergo sufflavit buccis terque quaterque suis. illa quidem tepuit digitosque admittere visa est, sed nemo potuit tangere: merda fuit.

A tart [scribilita], passed and passed around at dessert, cruelly burnt our hands with its excessive heat. But Sabidius’ greed was more fiery still; so forthwith he blew on it with his cheeks three or four times. The tart cooled to be sure, and seemed ready to admit our fingers, but nobody could touch it. It was filth.

I’m copypasting the translation out of laziness, but… it is not accurate. “Merda” is not just filth, it’s literally “shit” - Martial is referring to the dish as shit, to convey that it was awful.

From that “shit = bad” meaning, you got semantic amelioration generating the “the shit = the best”. English slang does this fairly often; refer to “sick”, “dope”, “wicked” doing the same. I’m not sure but I think that the underlying process is:

• “shit” as “extremely bad” →
• "shit" as “notably, outstandingly bad” →
• "shit" as “notable, outstanding” →
• "shit" as “noteworthy, good”

That also explains why “it ain’t shit” is generally negative - it conveys “it isn’t noteworthy”.