The two valves at your heater are combination passthrough/bypass valves. In the position shown in the photo, the valve plug is open between the upper and left ports, while the right port (to the bypass hose) is blocked.
When you turn both valves CCW a quarter turn (90 deg), the valve plug is open between the right and left ports, while the upper port is blocked.
It's a bit difficult to explain in words: (1) Looking down onto the top valve (hot water side) from the handle end, picture a "T" shaped cavity in the valve plug. In the position shown the two arms of the "T" are oriented vertically, with one arm at the upper port and the other arm reaching out to the bottom of the valve body. The leg of the "T" goes to the left, connecting to the left port. So one arm and the leg of the "T" tie together the upper port and left port, while the other arm of the "T" goes nowhere. (2) Now visualize that "T" being rotated CCW by 90 degrees. The two arms of the "T" tie together the left port and right port, while the leg of the "T" goes nowhere (goes to the bottom of the valve). No part of the "T" connects to the upper port (the water heater). With both valves In this rotated position, you are open through the bypass and both water heater connections (inlet and outlet) are blocked.