Regarding Tether, can a situation can unfold similar to how George Soros broke the Bank of England (BoE)?

In the 1970s, the BoE tried to keep the British Pound pegged to the German Deutsche Mark. However in the 1990s, Soros saw the BoE was vulnerable and there existed an opportunity to make some money by borrowing and selling massive amounts of Pounds (or shorting Pounds). For the BoE to keep it pegged, it needed to buy up the Pounds flooding the market by using its reserves of Deutsche Marks or other foreign currencies.

Eventually, the BoE gave up because it was blowing billions of reserves buying the Pound. Once they gave up, the value of the Pound collapsed and Soros made away a cool billion in profit.

So what is stopping a raider(s) from shorting USDT until Tether runs out of reserves to soak up excess supply and thus breaking the USDT = USD relationship? Or simply USDT hodlers rushing for the door at once.

It seems promising a peg between USDT and USD has put Tether in a vulnerable position. If they have less in reserve than what they claim to have, they're even more vulnerable to a market run on the Bank of Tether.

It is also relatable to the likely-to-fail Martingale strategy at the casino - doubling your bet if you lose. However, unless you have at least enough money as the casino, you will eventually hit a losing streak so bad you will get wiped out. In this case, the market has more money than what Tether has in reserves so eventually (maybe tomorrow or maybe in a 1000 years time) there will be a run and their reserves will be wiped out.

For example, Kraken allows 5x margin trading on USDT/USD pair. So in theory, if Tether had USD 2Bn in reserves, it only takes a collective USD 0.4 Bn used as collateral to short enough USDT to wipe out Tether reserves assuming other participants outside Tether don’t soak up USDT.

Let’s look at the risk/return on a hypothetical attempt to break Tether:

A raider (or multiple or whole market if there is a loss of confidence in USDT) would sell USDT and/or put up the assets as collateral and short as much as possible to push the rate below parity. However, say the market and/or Tether fights back and come up with reserves, fiat and/or other assets to buy USDT expecting it to get back to parity.

What has the raider lost?

A simplified case is a raider shorting at 1 USDT/USD. If Tether runs out of reserves to buy USDT and/or a market completely loses in confidence in Tether, the maximum profit he/she can earn is 1 USD per unit short if Tether goes bust.

But what if it goes to up 1.10 USDT/USD - the raider has lost 0.10 USD per unit short + trading / margin / borrowing fees. But wait - if it goes 1.10 USDT/USD it defeats the initial promise of Tether because the peg is broken. Therefore it is unlikely USDT/USD will go much higher than 1.00 for a sustained period of time.

The extreme failure case, is USDT is allowed to float ,USDT supply is limited by Tether and then the losses are potentially infinite but again - Tether has broken its promise and USDT has lost its advantage of being a pegged crypto.

It is much easier for Tether to issue USDT to keep the rate down than it is to buy and burn USDT to keep the rate up.

So it is most probable the upside of this strategy is way bigger than the downside. What is now needed (and is difficult to estimate) is a probability of success/failure to calculate the expected return of this gamble.

So is it worth the gamble? What if a average small-fry crypto investor took a short position hoping one day a raider will come along wipe out Tether? What is the maximum loss for said investor if the raid fails?

The above is fairly reasoned but what follows is speculation / un-answered questions so take it with a grain of salt.

Tether has issues with many banking partners - it appears it will be tough for them to move fiat in/out of their reserves to balance the market. Also, even if USDT could be redeemed for USD, it will be unlikely 1:1 due to bank fees and transaction friction. So I don’t even know why it is trading slightly above 1 USDT/USD.

It is documented that Tether is associated/owned by same people behind Bitfinex - one of the top 3 exchanges for crypto. Bitfinex has just resumed sign-ups for new accounts - except they require a MINIMUM deposit of USD 10,000 before the account holder is even allowed to trade.

If Tether and Bitfinex are associated, are the funds of Tether reserves conflated with deposits on Bitfinex? If there is a run on Tether, will Bitfinex funds be used to buy up excess USDT from the market? Will Bitfinex in-house trading buy up excess USDT?