Normally, when tar archives a symbolic link, it writes a block to the archive naming the target of the link. In that way, the tar archive is a faithful record of the file system contents. When --dereference (-h) is used with --create (-c), tar archives the files symbolic links point to, instead of the links themselves.
When creating portable archives, use --dereference (-h): some systems do not support symbolic links, and moreover, your distribution might be unusable if it contains unresolved symbolic links.
When reading from an archive, the --dereference (-h) option causes tar to follow an already-existing symbolic link when tar writes or reads a file named in the archive. Ordinarily, tar does not follow such a link, though it may remove the link before writing a new file. See Dealing with Old Files.
The --dereference option is unsafe if an untrusted user can modify directories while tar is running. See Security.