Your IP address is the computer equivalent to your street address. Much like UPS needs your street address to deliver a package, other computers on the internet need your IP address to communicate with your computer. However, other than finding out the general area where you live and what ISP you are using, there usually isn't much information you can get from just an IP address.
Your Runescape account wasn't hacked. The most likely scenario is you downloaded an RS Bot of some type that was a Trojan horse. It in turn logged your keystrokes and stole your password. Your stolen password was then received by some kid who probably barely knows how to run the client for the Trojan. These are script kiddies that can't hack their way out of a paper box. The other alternative is you used a really weak password and they simply guessed it. Who ever told you that having your IP address = steal RS account doesn't know how the internet works.
Masking your IP address means going through a proxy of some type. These strip your IP address and insert their own IP address. Then when the return information comes back, their IP address gets stripped out and your IP address is inserted. Then you get the information with the additional delay of the proxy server. Mechanically, this works very similar to the NAT firewall/router that you probably already use with your cable/DSL. Your local home network operates on local IP addresses and may have several computers while the router uses the single IP address obtained from the ISP.
Things I can do with your IP address are mostly limited to port scanning and a number of remote exploits if your system isn't current and you have no firewall. Since a hardware firewall/router/wifi/modem is the norm for most cable/DSL installations, none of this will work unless there is a security issue with the firewall/router or you changed the default configuration to port forwarding.
The first thing people claim when they have problems is "I got hacked" yet there is almost always some sort of bad behavior that downloaded and installed malware. Even a number of worms that exploit security holes are just malware and that just makes you a victim. In other words, you are the only reason you have problems better than 90% of the time. A hacker really has no reason to attack your specific computer most of the time. The Trojan horse programs such as the Runescape bots are sitting there waiting for you to volunteer to be a victim. There are a lot of people looking for an easy path that are more than willing to be a victim.
As proof of concept, I could send you a harmless program with virtually any icon I want on it including RS BOT. All it would need to do is open a little window and say "Had this been a real Trojan horse, all your passwords would be mine." Just like a number of Trojan horse programs, all your anti-malware programs would ignore it. The message would no doubt have a huge impact on a number of people and eventually the idea would be copied into a real Trojan horse program. The gag would no longer be funny then.
Shadow Wolf