That sounds like a pretty accurate assessment of this. I too suspect a small initial spike from when put in, that honestly shouldn't have harmed your fish... however, if they were weak in any way(it can be really hard to tell with fish) they would have succumbed to the ammonia and particularly high nitrate(which I do not understand, as of now).
It is possible when you put them in you mixed up some organics that started decaying further as well. I think the only way you could get an ammonia level of 8 is from the decaying fish though, as sara's test shows spike but not nearly that high, even in the crushed capsules.
Interesting though. Our tanks are such tiny worlds that things really can change things fast. A few connected or even unconnected events can wreak havoc on our tanks in such a short time it leaves us in panic trying to pick up the pieces.
I would say the most important thing for your particular tank is to do things slowly. Only put a few capsules in at a time over the course of week(s). ALso, I put them in my tanks during water change, mainly because I keep my arms dry, but also because it gives a new volume of water to dilute any organics and such I might be stirring up.
Later this week I will do a similar test that shows the comparison with substrates(a few different types) in place.