The Old Man is an aged one, the last living one of an ancient race of Crystal Mystics (perhaps even the Ancient Ones) that once inhabited the Underground Realm of the Gnomes.
Background[]
He had since become a hermit, and was waiting for the Enlightened One to come, and fulfill his destiny and thus had to stay in the living world for possibly eons. When Connor found him, they talked and he described his predicament to Connor, who thought the enlightened one was someone else. Connor did cheer him up a little. Later, when finding the Chamber of Enlightenment and defeating the Dragon Wyrm, the aged one was rejuvenated to a younger self and was happy because of Connor and that the hero had fulfilled his duty as the begetter and manifestor of the Light and savior of humanity. He then left to go to spirit-world of ancient souls within the Chamber of Enlightenment.
He may have been the prophet Hector who left a message for Connor.
Behind the scenes[]
Old Man may also refer to the hermit Ancient Mariner in KQ5 as mentioned in Quest for Daventry and Nintendo Power.
This character is called the 'Old Man' in the KQ8 hintbook, and simply 'Old guy' or 'Young guy' (after he transforms) in the debug mode.
It's notable that this character isn't listed in the game's credits, nor is he given a direct name (Connor refers to him as an "aged one"), further nodding towards the fact that it's probably the "Crystal Mystic", who may be the same character as Hector (who has lived for centuries waiting for Connor's appearance). Crystal Mystic as a term could apply to both characters (as one is heard from a crystal and the other is found in a room with crystals and gives you the crystal pyramid). Perhaps the same actor did both voices, and the credits don't distinguish between them (much in the same way that each 'archon', henchman, and each 'hillman'(and some of the other races) are covered under a single credit listing each).
In early development notes, there was was an idea that the player would discover the hermit, and it would only talk to him after the player had discovered the first mask piece. The hermit would explain things about an "island" King (who apparently lived in a shed on an island), the mask, and other things about the adventure. After the character completed the mask, the hermit would give a key to the Sun Temple. Parts of this concept seems have been folded into the Wizard of Daventry (who owns an island in the game, and tells Connor about the first mask piece he acquired). It also seems to have inspired the old hermit in the Underground Realm, who also offers explanations about the mask, and also gives clues to finding the 'Key' to Temple of the Sun (a crystal pyramid).
Interestingly the old man's comments are somewhat similar to the the comments made by the Crystal Dragon in KQ7, speaking of the spark of life.