[handmodel]

Can someone with more knowledge of finances and crypto explain this to me?

From the outside Tether always seemed like a scam. The characters involved scream scam and a stablecoin seems very easy to siphon off money from. So long as you assume that the number of Tether dollars held never drops by 80% then you can just pocket the 20% (of the giant number) and pay off withdrawals with new inflows. Due to the lack of regulation this seems like it would be easy to pull off - at least for awhile.

Is there reason to believe this isn't what's happening?

[IdEntities]

Rather than pocketing some percentage of the funds, the more likely scenario I've heard described is that they may have put some of the funds into slightly more risky assets than short dated T-bills and paid themselves the excess returns. While asset prices were generally rising this strategy worked just fine. Now that they have reversed and begun across-the-board declines, they may be caught out.

[handmodel]

Right. I could totally see that. But the end result seems the same. They either hope it grows and therefore whatever losses they have are small compared to total amount of people who would ever withdraw. Or double down again and risk losing even more.