Bultmann coined this term. What he meant was to strip the Scriptures of all supernatural elements and focus on just the human dimension. This, to me, is absurd. To discuss the Scriptures as if there were no God nor other supernatural agents is to systematically neglect the meanings intended by the original authors.
I give the word my own definition. The good kind of demythologization abstracts the theological lessons from the story elements by which the truths of the faith are expressed in the Scriptures. From this perspective, we can see that the Nicene Creed demythologizes the Scriptures, focusing only on the dogmas and leaving out everything else that is found in the Scriptures.
I love the line from the "Godfather" movies where the Godfather tells a young murderer, "Take the cannolis; leave the gun." When we demythologize the Scriptures, we take the everlasting meaning of them and leave aside the rest of the story.