They are water-based, and I'm not sure what the difference is between them and the old Letraset markers - as I've never used the latter. Looking at the Letraset markers, my guess is that they lay down ink like Prismacolor markers (very opaque and saturated) - the Copics lay down color in a more translucent fashion, and allow for more build up of color to achieve maximum saturation.
How this translates into being more expensive, I'm not sure.
They are kinda pricey outside of Ebay, but if you know the color you want, and you can wait - you can usually get them from $3-$5 shipped on the 'Bay. Michaels has them for $8 a whack, and I only go there if I am in dire need of a color immediately.
I may have missed something but Copics are alcohol based and I agree they are quite expensive. One of the things that makes them so costly I believe is the consistency of the colors. A lot of markers that are supposed to be the same color are usually a little but different, I have never seen this with a Copic marker. Also, I think the fact that you can replace the nibs and refill them adds tot he cost since you do not have to buy a new one everything the ink runs out.
Andy