Your bare hands are the result of having selected an empty box on your hotbar. This occurrence is rather rare after a small amount of time playing because your hotbar fills up rather quickly.
It is highly recommended that you do NOT use bare hands for any form of combat. They cause very little damage and seeing as you spawn with a knife and pistol, they are inefficient. Fist combat can cause certain enemies to recoil, stunning them (such as when you are ambushed by a skeleton in your mine) and allows you to gather your wits and pull out a real weapon, or keep it busy so someone else can kill it. However in Avatar laser wars 2 the left hand for the player is 3x stronger since their is no knife to take its place and 2 well placed punches can kill any player friendly or non-friendly.
Aside from the aesthetics of having your hands in the "ready" position, they serve very little use. They can be used early in-game to chop down trees and (slowly) break rock to save your pickaxe durability. Using your hands when having the compass and ores equipped makes your hands move faster, although this doesn't speed up mining speed and only helps with hand-to-hand combat. Also, using your bare hands reveals the most you can see of your avatar in the game.