For the sake of simplicity, I will be referring to Graf, Krieg, and Mu-01 as separate entities so you aren't confused about who is who.

[hider=Explanation]Basically Krieg is the true personality, and Grafdakka and Mu-01 are just names he adopts when he uses certain bodies. Big fighting robots are Grafdakka and smaller less combat oriented ones are Mu-01. While he generally utilizes mechs and robots, Krieg is actually some sort of ghost that possesses technology (He's very similar to a demon in that regard) for the purpose of fighting. However he can't travel far from the remains of his former body, which is a black box that contains information back when he used to just be a radar. Think of it like his soul jar: destroy that and your destroy all other instances of his influence and control. So long as this box isn't destroyed he can freely move around and possess machines near his body.

Now what prevents Krieg from simply say, jumping into the Eliticor, is that whatever he's possessing must be near his Black Box which he has never taken to battle yet. He does this to avoid being capture: The only reason Grafdakka is still in demon control is because Grafdakka is stubbornly fighting against the demonic possession over his body because he wants more power. This doesn't really affect Krieg in any meaningful way aside from the fact that he's being distracted and wasting time fighting the demons in his head instead with his guns.

What Hibiki did was kill Krieg, who in turns kills Grafdakka. Like killing the necromancer controlling the undead, without Kreig Grafdakka ceases to exist and dies. Right now Balrog may begin to notice that he has a much better control over his body now that Grafdakka isn't fighting him. That being said, it also removes the golden eye enchantment or whatever is left of it. For all intents and purposes however, Balrog can keep the body.

All this time Grafdakka could have just left his body behind to avoid being captured by the demons. He simply wakes up back at his black box and continues as if nothing went wrong. I would dare say that if Grafdakka was at the last battle at the alchemist's tower, he could have escaped any form of capture since capturing his body means nothing to him, and the moment it's gone or he leaves it he'll find himself back at his black box. But I wouldn't think too hard about how much more powerful Hoho or any other character is to prevent that from happening.

As for the Black Box, Krieg has [i]never[/i] let that actually go to battle. He always possess a mech in the safety of the Machina capital and simply walks the rest of the way in that body. Once his spirit goes into a machine it can move as far away from the Black Box as he wants to, thus he can safely keep his real self hidden and fight to his heart's content. Even if his body is captured he could just kill himself or leave the body if self-destructing isn't possible, and avoid capture that way. Again, the only reason he didn't do that to Balrog is because he wanted to take over Balrog, and OoC it was because I've used Grafdakka three times already and wanted to use different characters.[/hider]

TL;DR: The Blackbox never goes into battle, it stays with Mu-01 so Krieg can fight as much as he wants with Grafdakka without worrying much about being captured. Hence why his forms always have some sort of self-destruct, since Krieg himself isn't worried about what happens to his body. The only reason he was captured by the demons was because he was consumed by a lust for power and wanted to try to possess a demon, and OOC because I needed a good reason why he wouldn't be at Hoho's trial since he always heads to where the fighting is at. Hibiki basically free's Krieg by destroying his Black Box, which is kinda like killing the necromancer powering a zombie army: cut off the head and the rest dies. Now Krieg is forced to resurrect like everyone else who dies instead of just going back to his Black Box again.

As for why he didn't do that in the first place, again, he was trying to take over Balrog's spirit to power his giant mecha body when he fought with Juno. Balrog can keep the body, though it loses out on stuff like the Golden Eyes and junk.

And technically speaking, up until now Krieg has never died. Even when Grafdakka suicide in the first battle all he lost was his body, and his spirit remained. This is how Krieg doesn't worry about capture since anyone who takes his body is remotely controlled. Thus he fights as Grafdakka to his heart's content, knowing that nothing he or what his enemy does to his body will harm his black box in any way.