The central mystery of the Crimson Witch is resolved in classic Scooby-Doo fashion. Velma unmasks the witch to reveal Delilah Domino, the head of security for Kiss World. Her motive was not supernatural; she was a former employee of a government defense company who was fired. Knowing that the Black Diamond was essential for advanced laser technology, she planned to steal it during the chaos of the hauntings and sell it to a competing company for a massive profit. She used a combination of hallucinogenic gas, projectors, and an anti-gravity belt to create the illusion of the Crimson Witch.
However, the film's biggest twist is that this rational explanation does not negate the supernatural events. After Delilah is arrested, Velma concludes that the entire trip to the dimension of Kissteria and the battle with The Destroyer was a mass hallucination caused by the witch's gas. This allows her to maintain her skeptical worldview. In the final scene, Shaggy and Scooby witness Kiss thank them before flying off into space in a spaceship, confirming that they are indeed super-powered cosmic beings and that everything they experienced was real. They decide not to tell Velma, choosing to let her believe her own rational explanation. This ending cleverly services both the traditional Scooby-Doo formula and the fantastic mythology of Kiss, revealing that a 'man in a mask' and a real cosmic threat were coexisting all along.