1. People holding USDT realize they are holding nothing. The potential losses could scare crypto holders and create a bank run to sell for FIAT.
2. The demand for BTC that drives up the price is inflated. Bitfinex does not actually have anything valuable to be exchanging for BTC. This would certainly cause the current bubble to pop.
In the end every holder wants to know when the next pop is going to happen, no?
It's interesting to think about how in the short term at least, people would sell USDT for anything, particularly BTC, ETH and other stable coins like USDT or DAI in this scenario, so I would expect a price spike in BTC if there was some critical event where USDT collapsed.
I guess it would reflect a false value of real liquidity in the whole crypto market so would have to depress BTC price for a time after the dust settles.
Dollars simply because it is an increase in demand. Of course, the relative dollar increase would be less than the USDT denominated increase. If USDT is pennies on the dollar, but these fractional dollars are bidding for BTC, BTC will go up in dollars.
Most people don't hold a lot of tether at any given time. If you bought any tether, you probably did so with the expectation that you will sell it for some other currency, either crypto or fiat, very soon.
This isn't true because with DeFi yields averaging in double digits, many people are holding all forms of stable coins to accrue this massive yield. Some people are entering the stable coin market with fiat simply to get this yield and have no interest in buying Bitcoin with it.
It is also irrelevant to frame the situation from what "most people" do when the question is what are the people holding all the minted tether doing with it? It does not disappear; if it is not cashed in for fiat then it is still being held by someone.
It is no secret that in a crypto asset bull market, people are "shorting" fiat to leverage long rising crypto assets. Additionally, just by virtue of overall liquidity entering the space longing assets there is demand for speculation and transaction volume, thus demand for fiat, across the space.
Various protocols on ETH are providing decentralized trading (Automated Market Makers), as well as other financial primitives like lending and borrowing.
So... yields accrue to those who supply fiat liquidity to borrowers (who yes, are speculating on crypto assets; "shorting" dollars). They also accrue to suppliers of liquidity to AMM's in the form of transaction fees to the various protocols. So, "monetary velocity" is high in DeFi and crypto now, so yields go to those enabling it.
When bear market comes, it is almost certain the double digit fiat yields will decline. But will they still be higher than pitiful bank and sovereign bond yields? Maybe. Also at that point perhaps lending crypto assets to those "shorting" ETH/BTC and longing fiat will mean decent yields on that side of the trade.
Ultimately these decentralized DeFi protocols are cutting vast layers of middle men where traditional banks and monopoly players take huge cuts of the overall economic value and velocity[1]. Instead of NASDAQ or Goldman Sachs or whoever to take a tiny cut of transaction fees from financial transactions, you do by supplying liquidity to decentralized finance platforms. So there is room for some decent yield to be sustainable. We'll see.
Who? The greater fool. Why? For the hopes of being able to sell to an even bigger fool eventually.
Crypto currencies do no business, and will never pay dividends, do stock buybacks, deliver interest, or perform any other function of actually generating yield.
You realize someone holds all of the Tether outstanding at all timed, correct? It doesn’t just vanish.
Further, there are many sites paying 12+% interest for people willing to deposit their Tether. This serves as an incentive for people to keep money in Tether rather than BTC/ETH or fiat.
1. People holding USDT realize they are holding nothing. The potential losses could scare crypto holders and create a bank run to sell for FIAT.
2. The demand for BTC that drives up the price is inflated. Bitfinex does not actually have anything valuable to be exchanging for BTC. This would certainly cause the current bubble to pop.
In the end every holder wants to know when the next pop is going to happen, no?