Using configuration-state-constrained electronic structure calculations based on the generalized gradient approximation plus Hubbard U method, we sought the origin of the giant tetragonal ferroelectric distortion in the ambient phase of the potentially multiferroic material BiCoO3 and identified the nature of the pressure induced spin-state transition. Our results show that a strong Bi-O covalency drives the giant ferroelectric distortion, which is further stabilized by an xy-type orbital ordering of the high-spin (HS) Co 3+ ions. For the orthorhombic phase under 5.8 GPa, we find that a mixed HS and low-spin (LS) state is more stable than both LS and intermediate-spin (IS) states, and that the former well accounts for the available experimental results. Thus, we identify that the pressure induced spin-state transition is via a mixed HS+LS state, and we predict that the HS-to-LS transition would be complete upon a large volume decrease of about 20%.