To start of this long-ish post about my theory, I'm going to quickly put the games in order of when I think they happened
THE BEGINNING OF THIS STORY IS BASED ON THE PIT PEOPLE 'JOINING OF SOULS'
We begin our story before Earth or any other planet or star existed, apart from 2. The red star and the blue star. One, a raging ball of lava, the other, a glorious glowing orb. They eternally spin around each other, never hitting, despite the red one's desire to do so. They collide, causing two things to happen. The blue and red merge together, and cause the first living creature to exist, HoneyHUG. The rest of the energy is dispersed into the universe, creating stars and planets and life. From the merging, a red crystal appears. A crystal of pure evil.
HERE'S WHERE THINGS GET A LITTLE LESS GUESS-LIKE
The crystal lands of Earth, and Castle Crashers begins. The crystal is found by the king, and he uses it for all his magic-y magic. Mr wizard steals it for his own use. Castle Crashers plays out (what actually happens in the game isn't important, it's what comes after). Mr wizard is dead, and the crystal is returned to the king, but each time the king dies, the king's soul is absorbed into the crystal. The crystal is passed on from generation to generation. Enter Purrham Furbottom. He uses the crystal to make a hat, a glorious hat. He creates an island theatre, and lives there with his cats. The hat from there is passed on from generation to generation, still absorbing the souls of each person and corrupting them like before. The battleblock theatre events take place, and then it absorbs Hatty's soul. Hatty's soul is so good, it cannot be corrupted, and the hat LITERALLY spits it back out in the form of a laser, along with ALL the other souls that are corrupted. The NONONONONO you hear at the end of battleblock theatre is the narrator, of course, who happens to be... HONEYHUG. The laser shoots up and crashes the ship that the alien hominid was in. SIDE NOTE: In castle crashers when the big alien flies off in the escape pod, THAT'S the ship that gets shot down, and therefore, that's alien hominid. That's where alien hominid takes place. The laser continues, and shoots HoneyHUG. The laser absorbs the soul of HoneyHUG, and combines it with all the other souls that have been corrupted, so that those human souls can corrupt HoneyHUG. Honey falls to Earth, crashing in to it, beginning pit people. The laser manifests HoneyHUG's now evil soul into that of the Pit People narrator, the bear. This bear is the manifestation of the red star, whereas HoneyHUG was the manifestation of the blue star. That crystal was The Bear from Pit People, corrupting itself and feeding
HERE'S SOME SPECULATION ABOUT THE END OF PIT PEOPLE
Remember Hatty's soul that couldn't be corrupted? Eventually, you, the player, show the Pit People Bear his last soul that was never used, Hatty's. The Bear goes conflicted, and HoneyHUG's corpse rises from the ashes of Earth. As it rises, the bear is screaming and yelling in fear, until the two bears touch. They join souls, back into HoneyHUG.
THIS PART IS JUST FOR FUN
Unfortunately, Hatty doesn't come back, and remains at the bottom of the ocean... Well, I say that, but the new HoneyHUG has a top hat. I'm sure you can figure out who the new HoneyHUG is.