The simpler explanation is that the current price point is clearly unsustainable and thus shorting GME is a crowded trade. As one fund exits another fund enters. If GME goes to $1000 people would still be shorting because, again, this price is unsustainable. It would be new people shorting though as most of the funds shorting at $300 would exit by the time it goes to $1000 (hypothetically).

At the same time there is no world in which GME is worth more than $100 in 3 months, so the question now is who will be the greater fool holding the bag when it goes down. Whatever money shorts will lose now they will regain on the way down (although the short sellers losing money and making money might be different funds as some exit and some enter positions). Of course, the real money makers here are MMs that will be collecting a huge bid-ask spread on both directions.

I don't think there is much good news for the retail investors though. As with all bubbles the people who got in early and had the acumen to sell before it pops will make boatloads, but the vast majority will lose.