Within the community in which I circulate, I know personally of several who think of themselves as dragons, fey, cats, and other critters not human. One guy, I know, folks think of as a dragon incarnate in human form only for this one lifetime; it's true, he does have trouble socializing well, and he does love fire. . . .
Never heared such referred to as "Otherkin." I like the term.
My understanding of this has been evolving now for several years. I think my current take on it is this:
Western culture has been thoroughly indoctrinated--read "brainwashed"--in the idea that there is an absolute and objective reality and, further, that if something cannot be shown to be knock-on-the-table solid, if it is imaginal, it must not be real. Since the time of Descarte, science and religion have been relegated to two separate boxes, and neither is allowed to play in the other.
One aspect of the New Age movement, the revival of witchcraft and the reawakening of ancient Goddess religions has been the rediscovery of the power of myth. I think it fair to say that modern culture has largely abandoned myth--unless one cares to argue that the vacuum has been filled by pop-heroes, rock stars, and movie icons. Classically, however, myth did what I do for a living--use a fictional framework to tell people about themselves. Myth creates a pathway into our deep subconscious, enabling us to connect with a Reality deeper than that which we experience in the waking world.
Practitioners of the ancient mystery religions did not, for the most part, believe literally in Orpheus or Kore or Demeter or Hades. The evidence suggests that these were accepted as stories that guided people to a deeper truth, and an awakening of new understanding, illumination, and experience within. I'm thinking, too, of the many Biblical and Apocryphal tales supposedly written by Moses or Job or Elijah or Daniel. The authors circulated these with the names of well-known historical figures, and the practice at that time was widely accepted, even honored. It was a perfectly valid means for promoting the work's message. Only our recently arisen, hypercritical culture insists that either these claims MUST be literally true, or, since they obviously CANNOT be literally true, they must be lies deliberately perpetrated as literary hoaxes. I think the revolutionary author of The Book of Job (a brilliantly disguised attack on 5th-6th-century BCE priestly dogma) would have been shocked at that interpretation. In my occasional battles with Biblical fundamentalists, I bewail the fact that accepting Genesis as literal fact--something that could have been recorded on videotape had there been such at the time--performs a savage injustice to both Judaism and Christianity. If we see it instead as myth--myth lifted, incidentally, from ancient Sumer and with the serial numbers filed off, AND IF WE CAN GET PAST THE MODERN JUDGEMENT THAT MYTH EQUALS LIE--then the Genesis creation account becomes a pathway for those attempting to explore their own relationship with God on a deep and meaningful level.
What does this have to do with Otherkin? Simply this. I feel certain, based on personal experience, that many "Otherkin" are involved, as Brian so nicely put it, in fantasy role-playing; they do it because it's fun, it's cool, their buddies are doing it, and it gives them that wonderful mystique of "I'm special and I know something you don't." I suspect that the vast majority of Otherkin fall into this group, especially among teenagers and young adults.
But I also believe that many sincere and honest people take on the personnae of fantasy beings in order to explore and understand their own psyches. For them, being a "dragon" or a "cat in human form" or "one of the fey" becomes a very personal form of myth, and subsequently a tool for spiritual growth.
I would also argue, in the same vein (that's for all those Otherkin out there who pretend to be vampires), that many of the creatures assumed by these people are essentially archetypes in the classical Jungian mold. Dragons tend to be powerful and magical protector/warriors, cats self-sustaining and independent, the Fey ancient and magical beings drawing upon deep Earth magicks. To connect closely with one of these is to connect with elements of our own deep subconscious, and this is an essential early step in training oneself in magic and in figuring out who and what we truly are.
A few months ago, on this forum, I argued that whether or not a hypnotically regressed memory of a past life was objectively real or not was not the point. There are cases on record that appear to demonstrate the reality of past lives; the vast majority . . . there's no objective proof one way or the other. But it doesn't matter, since the memory of that past life, drawn as it is from very deep within a person's subconscious, emerges for a reason, one generally associated with that person's need for healing, forgiveness, or self-understanding.
Is my friend mentioned above "really" a dragon? Objectively, no. On the other hand, I HAVE seen him project an extraordinary aura that includes vast, dragonish wings, and I have interacted with him, as a dragon, in trance-work and spirit journeys; on some level, in some reality, yes, he is a dragon. [It's amazing to watch babies interact with him; they appear to be fascinated by his "wings!"]
Yet another example of my ongoing thesis that we do create our own reality!