The original investment by U/deepf***gvalue sounded a perfectly sensible investment position based on fundamental analysis. As he describes it - he spotted that lots of short positions existed beyond the free float, but that the company was cash generative and had sufficient cash to meet its obligations in full. Note this was at $5 a share and over a year ago.
Secondly the short positions were clearly overextended here due to the size of the shorts versus the free float. Therefore unless there was ultimately a bankruptcy, they were going to overall get themselves into trouble as there would be a short squeeze. Melvin Capital et. al. do not sound terribly clever in all of this.
Thirdly the original options strategy adopted by Reddit was using cash settled call options which theoretically could have meant that a majority of Redditors got out ahead if I understand it correctly - even if the timing of the plan/ exit was very unclear. You could have seen the crowd drive the price into a specific call option expiry dates and then collapse. Coordinating this without committing pretty obvious market manipulation would however be difficult and it looks like it was never likely to be achieved.
The Reddit strategy was hampered by the restriction on the purchase of calls options by investors on retail platforms. This was always going to happen as logically when the market was completely one sided and price volatility was exploding, the exchange which sits in the middle of this guaranteeing the options trades, was required to request significantly more margin. This they duly did last week and asked for $33.5bn overnight. As Robinhood and others are not very large players they were inevitably going to need to raise equity very quickly and stop selling call options on these specific stocks.
Redditors believed they were being cheated by Robinhood and starts buying straight equity in the likes of GME/ AMC/ BB to maintain the exposure and fight the evil hedge funds. Now we are in the situation you describe Klement...the shorts will 'win' at some point, but in part because of natural feedback loops caused by the original strategy.
An outcome of all of this might be lots of the retail brokerages facing solvency stress. So Reddit could end up trying to break hedge funds and end up putting their brokers into distress.
One maybe interesting angle in all of this in the original trades - who was analytically correct? Were the hedge funds legitimately seeing a company who would go bust or was deepvalue spotting a company that was trading well below its fundamental value?