I've heard that theory, but I can't say I understand it. Let's say USDT goes to 0 instantly. All traders lose their parked money. I can see a crash from panic and from people recouping their lost safe money, but what else does it have to do with with cryptocurrencies?
If USDT would go to 0 instantly many things would happen (a few of the biggest BTC fiat markets would not be able to operate, such as binance's main BTC market). As a practical example big traders would obviously sell their tether straight into crypto on those markets. But since they don't want to be exposed to that much crypto they would sell the same amount on other exchanges (such as Coinbase). In these chaotic events the biggest traders will fly to safety for most on their books (actual fiat, or hedged via derivatives).
But that's not the potential issue being described: Tether is supposed to be worth 1 dollar. A lot of big crypto markets run on tether. If it turns out that a lot of crypto was bought with synthetic dollars (tether) that turned out to be a lot less than a dollar, that would mean the price of many crypto projects got to where it is by imaginary money. In another word: overpriced.
If you're running off a cliff and you know there's a safety net to protect you, it makes the act of running off a cliff safer. Ergo, more people will run off the cliff.
What happens when that safety net vanishes as hoards of people are running off the cliff?
Edited to add:
This isn't really a theoretical issue, either. Risk is part of the price of a security. Something that has a high risk, may be valued less by investors. Often other investments will carry the same amount of reward but less risk.
