Wouldn’t people just buy BTC and ETH with the banned Tether and pump them to the stratosphere as they tried to leave the sinking ship? I remember something similar happening in 2019 or so when there was some extreme Tether worry and the price of BTC started going up and up.
There’s a lot of money in stablecoins at the moment.
Somebody would! (Or rather, some thing.) There are a lot of smartcontract liquidity pools in Ethereum that facilitate trade between two tokens. The set an exchange rate by a formula that only looks at how much of each token is currently in the pool, not at prevailing market price[1].
So if and when it's apparent that Tether will be worthless, there will be a mad dash to dump it in those LPs in exchange for the other tokens, which was what happened to TerraUSD [2].
Here's a list of the LPs that have Tether as one token, just on Uniswap:
Both would happen simultaneously. Think of crypto like a balloon with only a narrow exit at one end going out into fiat: if you push down on Tether, BTC/ETH will inflate in Tether terms (because everybody who can moves into other cryptos) but deflate in USD terms (because there will be a run for the exits and a lack of buyers).
If the crash is bad enough: Tether itself. Or Bitfinex, its parent.
If they buy up their own debt at $0.01 on the dollar then they got away with their fractional reserving scheme, and their executives walk free. Free and very wealthy.
There is always a clearing price. The question is simply "how low"?
My experience in crypto tells me that there is usually always someone willing to be on the other side of the trade. People exiting Tether would still be exiting through a smaller and smaller door of BTC and ETH going up and up. More and more desperate to pay any price to exit Tether.
Suppose you owned clean ETH and someone offered you a 10% premium over the going rate if you were willing to accept sanctioned Tether in exchange. Would you really accept that deal?
There’s a lot of money in stablecoins at the moment.