As long as it doesn't turn out to be an exit scam, if Tether begins to prove insolvent people will sell back into ETH and BTC. Some will be left holding the bag, and distrust for centralized exchanges will continue to grow. In the end, I think that would push us in the right direction. However, I don't see it actually happening. Why would Tether need come up with all of the actual dollars supposedly backing the Tether? It is like any fractional reserve banking system in place today. The world already runs on this type of financial system. Unless a great collapse happens causing many to withdraw at the same time it is business as usual.
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But if they say there is enough dollars to back each coin and then it is proven that there really isn't? Plus when you factor in that those coins were used to purchase BTC, thus propping it up with artificial "dollars", doesn't that possibly crush confidence? As well as possibly make Bitfinex insolvent? Which would cause major forced selling of everything on that exchange? Then if there are other exchanges doing something similar with Tether, possible cascading effect?
I agree. There would be lots of pressure on Bitcoin since so much is bought with dollar backed Tether. and it wold cause a cascade in all of the currencies. Let's hope it does not happen.
Fractional systems collapse when there is a run on the banks.
You give the reason for why it can't stay solvent. You literally can't cash out. Someone has to hold the Tether bag.