The Hitchhiker's Towels are used to travel from one place to another. They have a 1 in 15 chance of losing their color and going back to the plain color if you are using a dyed one. If for some reason you have lost your Hitchhiker's Towel, or you want one to get colored, you can collect a plain one from any Soul Menhir.
The colored towels can be made by following the instructions on the page called Gemstone, and more information is provided there as regards the required items to color these. Note that it is not dye that is used to dye these towels.
Take note that it is not advised to carry more than one color at a time in your inventory, as the towels may blend colors, and you will lose the colors you have stored to something else when you teleport. If you have another towel in your inventory when dyeing, it will also cause problems. Make sure you have only one towel on you when dyeing a towel, or when teleporting. Also, remember that the towels have a cooldown period of 20 minutes, meaning you can only use one towel within 20 minutes. This includes using ANY towel, and not one specific color.
Including the plain one, there are 11 varieties of Hitchhiker's Towel: