Simply finish the Single player mode in Normal difficulty to unlock the Hard mode.

You'll have to finish the Single player mode in Hard difficulty to unlock the Very Hard one.

Beat the game with Very Hard difficulty.

Beat the game once with any character.

When you start a battle using kakashi, press Down + Triangle Kuchiyose: Doton: Tsuiga no Jutsu (Tracking fang jutsu) then quickly charge your Raikiri (Lightning blade) to the max then the victim(s) will K.O.