The argument here isn't that Tether has no cash on hand, it's that if enough people pull out, they hit the the bottom of the non 1:1 reserve and everyone else left holding will zero out. If you have 1 kg of gold and start selling papers giving people claim to that 1kg of gold, nothing will prevent you from seeling 1000 claims, making it seem like you're holding a ton of gold for people when looking at the market cap, but if 2 people come and ask you for their 1kg of gold and you don't have enough of the cash you got seeling claims on hand and an oppotunity to buy gold quickly, then from one day to the next 999 claims are worthless.

This is of cause not a big risk in the industry normally because markets are regulated and those who hold gold or other assets backing claims go through audits.

Naturally Tether can't go through an honest audit because even though they might be holding enough cash to cover a decent amount of the market, it would expose them for lying over time, which would still hurt their business tremendously.