Current situation with dumb money buying BTC:

Tether prints tethers to buy bitcoin

BTC-USDT price skyrockets

Arbitrage bots buy BTC-USD, because everyone assumes 1 USDT = 1 USD

BTC-USD price matches BTC-USDT price

Price increase brings in more dumb money USD to buy BTC, skyrocketing price further

Arbitrage bots sell BTC for USD, profit

Tether sells BTC for USD

Tether is now “backed” by USD — can afford to redeem tethers for the small number of people who convert USDT to USD

Tether pockets USD, prints more tethers …

What if the flow of dumb money slows down or stops? (due to higher prices, and simply no more mattress cash to dump into BTC)

Tether prints tethers to buy bitcoin

BTC-USDT price skyrockets

Arbitrage bots buy BTC-USD

No more dumb money = no more USD arbitrage profit

Less arbitrage = increasing gap between BTC-USDT and BTC-USD prices

Now there is arbitrage opportunity the other direction

Buy BTC-USD, sell BTC-USDT, sell USDT for USD

Tether now has to redeem tethers for USD

The bigger the gap, the more tethers they have to redeem

If they stop printing tethers, the BTC-USDT price collapses

If BTC-USDT price collapses, arbitrage bots buy BTC-USDT and sell BTC-USD, further collapsing BTC-USD

If they keep printing, the gap widens and they have to redeem more and more tethers for USD

At that point, the game is up and Tether will have no incentive to continue redeeming tethers. The tether market collapses. You can redeem 1 USDT for 1 cent. BTC paper profits are wiped out. Tether is left with >600 million USD in the bank.

The phenomena to watch out for in this scenario are: