Refraction is the bending of light waves and occurs when a wave passes from one medium to another. In this case, the penny is originally in the bottom of the cup without any water and is not visible to the camera. As water is added, the light is refracted and the penny is “magically” brought into view without the camera being moved. The penny we see at the end is a virtual image as the penny (object) is in the same spot it started.
Every transparent medium has its own index of refraction. At first, there is no bending of light as there is only one medium and that is air. The greater the index of refraction, the greater the change in direction of light. Water has a greater index of refraction than air. Therefore, once water is added to the cup, the penny will come into view because the light is now bending as it passes through a different medium. The penny appears to keep moving as the water level rises because as the depth of the water increases, the angle of refraction increases. The angle of incidence remained the same as the camera did not move. Only the angle of refraction increased as the water depth rose.