No one really knows how much of tether is backed. The claim of 74% seems high to me. But compare that to traditional banks. They back up their deposits with just 10%, and they function well for decades. We all know it's a game of musical chairs, yet it all somehow stays afloat...
If tether starts to crack, the value of a tether will obviously drop below $1, and people will rush to sell, which will only further drop the price.
But what will they sell tether for? They won't be given dollars. They will exchange their tether for Bitcoin.
This is why I don't understand why people think when tether collapses, it will drag the entire market down. People will be exiting their tether position into Bitcoin, which will put upward price pressure on Bitcoin.
Dozens of exchanges are using USDT as their main source of liquidity (they can't get fiat pairs). Tether is convenient for them, it's a unit of account and a safe haven from volatility.
If such bedrock collapses there will be dozens of entities (which are also deep in tether) going under causing waves of uncertain effects. Altcoins are very often paired against USDT too. So a collapse of tether value would instantly dry the liquidity of many exchanges and countless USDT/COIN pairs, wipe out trading of many altcoins and cause a total crunch of huge portions of the market as people would desperately try to offload their shitcoins while tether would creep towards zero, and those who had tether would run towards anything that has a fiat pair. Many alts would simply die and that could further negative sentiment.
At this point, this is where people diverge. Some say it would drive the price of many coins like BTC or ETH up due to rapid exit, some say they would shortly dump when people run towards fiat ramps to the exit the impending doom (that might or might not even be real but all it takes is a conviction of many people that it is real). In the end, the issue is that Tether pretends they're stable, they're backed and they're dependable. And they already have systemic importance and are like a creepy octopus that has its tentacles wrapped around so many businesses in crypto. What happens when systematically dependable instrument collapses can be speculated on by looking at the history of financial crisis when stuff that was systematically important and supposedly unsinkable sunk like a rock. Oh and no bailouts and lender of last resort this time bros, this is what you wanted, this is what you'll get.