"Could you try and explain to me what happens when that valve is open?"
The cold water goes into the water heater in the bottom pipe.
The hot water comes out of the water heater in the top pipe.
The valve on the left, when open, allows water to bypass the water heater.
The bypass is generally used when winterizing the water system. Open the valve on the left and close both valves on the right to bypass. It allows you to fill all the water pipes with RV antifreeze without having to use 6 or 10 gallons of RV antifreeze to fill the water heater. Just drain the water heater.