Presumably the value of Tether would drop much farther than the value of other crypto.
If USDT drops 90% and BTC drops 50% in USD terms, the BTC would gain value in USDT terms and your loan would be even more overcollateralized.
Then you could pay back your loan with USDT at ten cents on the dollar and make an absolute killing.
Love to hear this.
1)In normal FX markets the amount transacted goes to trillions of USD per day, and liquidity at the touch is very high. So if you need to unwind a position there will be people who will take the other side and the market won't move much even if you're trying to unload a lot of a single cross.
2)In equity markets (which I'm a little more familiar with from a microstructure point of view) a single large market participant like a big broker/dealer will do more than a billion client orders on a busy day (when you add up the orders they do internally and all the child orders from executing trades in pieces). If you wanted to do a billion transactions on the ethereum blockchain at the current throughput it would take you almost 2 years, and no-one else would be able to do anything. So making a lot of trades fast isn't really possible.
Obviously chains like solana would help this a lot, but the point remains that in the current defi ecosystem markets aren't very resilient because they can't react as fast and they don't have the kind of depth of liquidity that conventional markets have.
Have you looked into the mechanics of this trade? The crypto loans I'm aware of are all significantly overcollateralized. You would have to pledge say 1m BTC to get 0.8m BTC worth of USDT which you could then sell for dollars. If you succeeded USDT tanks, everyone who holds USDT would be rushing for the exit, wiping out the crypto you pledged as collateral also. So you succeed in losing 20% of your money on the initial USDT trade and almost all of the value of the crypto assets you pledged for the loan as well.
These markets are nowhere near as flexible and liquid as regular fx - I would be amazed if you ended up making money overall on this kind of strategy and the execution risk is significant.