USDT is scary because of the lack of liquidity for everyday investors, but I don't buy into the fact that they don't have the fiat to back it up.

When Tether issues a million coins, those coins get sold on the market for (close to) a million dollars. They immediately have the fiat to back up every coin issued. Even dropping those million dollars into a regular savings account at 2% annual interest would leave them with plenty of profits to work with.

There is the potential that they invested some of their money into crypto, and lost out big when bitcoin plummeted. But unless they have an awful business model and zero oversight, one must assume that they have diversified their portfolio enough that they would have sufficient fiat to handle some withdrawls.

It's sort of the same argument as we have with fiat currency. There are not enough coins and bills in existence to cover even a tiny fraction of all the fiat currency that exists in the world, but since everyone isn't going to withdraw their physical fiat currency at once, the system carries on working just fine. The same is true for USDT. Even if they don't have sufficient fiat to back it up, it still continues to function as a currency pegged at 1USD so long as the currency's investors don't all withdraw their funds at once. The only thing that makes USDT scarier is that we don't know how much fiat they're holding, and they're less regulated than regular fiat systems.