Man I am trying to remember this was so long ago. Here is a much updated version that what is on the arcade. http://www.elf-games.com/games/gamemix/gc/
Anyway, far as I remember the hole is just a sprite with the bullet behavior and it's speed matches the speed of the ground. It's created when the missile collides with the ground. In the game, the backgrounds and ground are actually moving with Bullet, not the player.
I hope that helps.