HotLink Protection prevents other sites from linking files from your site directly from your site. Thus a malicious user will not be able to link any files other than those chosen by you (eg html files). An example of hotlinking might be using an <img> tag to display an image of your site anywhere on the Internet.
The end result is that the other site is stealing your bandwidth. You should make sure that all sites that you want to allow external links to be on the list you create. This system tries to add all the sites that you have in the list, however you may need to add others.