Definition: The modern definition of a "cape hole" is a hole on a golf course that plays around a large, lateral hazard, and presents a risk-reward tee shot. That hazard is often water, and such water might extend the entire length of the hole. The fact that the fairway on a cape hole gently curves around the hazard means that golfers on the tee face a risk-reward decision: Carrying more of the hazard means placing your drive farther down the fairway, but also creates greater risk of losing your ball in the hazard.
The hazard around which a cape hole plays can be something other than a typical water hazard, however: huge bunkers, native area, marshy area. The key point is that a cape hole forces you to think about how much of the hazard you want to cut off in order to carry your ball closer to the green.
In geography, a "cape" is defined as a piece of land jutting out into water. And the term "cape hole," in golf, originally applied mostly to greens that were designed to be jutting out into a hazard (surrounded on three sides by water or sand, typically). One of the most famous cape holes, and one of the originals, is the 14th hole at National Golf Links of America, where the green sits in such a fashion. But that hole also, coincidentally, presents the risk-reward driving decision as the fairway plays around a hazard.
And so, over time, the term "cape hole" has evolved to be defined more by the risk-reward, diagonal-drive-across-a-hazard tee shot. Greens that jut out into a hazard can be called "cape greens."