You're assuming that a non-pumped HBD will crash as much or as easily (or at all) as one which is pumped to $10+. I believe this is false.

This is a very important to get right. Here is my reasoning.

People buying HBD right now at $1.25 are just speculating.
People buying SBD at $6.5 are also speculating.

When we enter a crypto bear market, SBD speculators will get scared and sell, that's easy to imagine. We already saw that in the past.

However, hive's case is now different (since the proposal). Speculators buy HBD at $1.25, expecting it to go up. We use the DAO to bring the price back down to $1. As long as we don't succeed because of increased demand on HBD, we recycle the HBD and the profits made to sell even more until HBD reaches 1$.

At that point speculators lost 20% on their trade (still assuming $1.25 per HBD originally). When the crypto bear market comes, similar to SBD speculators, HBD speculators will be looking to sell and put their money back in their bank accounts.

Since HBD is already at $1, the sell-off will cause it to go below $1, especially considering how sharply panic selling occurs in crypto.

If the profits that were made by the DAO stay in there in the form of HBD, they become now worth much less (following the market price) and its hard to give them out to people if there is low buy liquidity without crashing the price even more. Hence my term, "imaginary profits".

If instead the HBD were already spent while we had a lot of demand for HBD, at least we benefit from that, but we still get a problem with HBD and hive because of the negative feedback loop. But, it is unlikely that we'll spend everything before then.

If instead the HBD profits are burned, this is equivalent to burning the HIVE bought before being converted. Again this is bad, because we are burning bad when it is highly valued in a bull market by issuing debt and then repaying that debt (which doesn't change in dollar terms) with hive that are worth less in a bear market. This is simply money lost.

If the money was kept in a stable coin outside of hive, it would be real profits.

In reality the leverage ratio is currently tiny (1.1x max, given the 10% cap)

That's not true, unless you don't care about repaying debt. The leverage ratio is 1.1 max because HBD goes down to match that ratio. That means that we'll never have a debt problem if we also accept that HBD will be valued below $1, and that it will fluctuate along with hive's marketcap. In that case why have a stable coin at all?

And who would ever want to hold such a coin? I would sell all my fluctuating HBD, because they have literally no value. I assume everyone would do the same. Therefore, HBD will constantly go below the 10% threshold, and constantly provide opportunities for arbitrage.

And everytime someone takes advantage of the arbitrage, he pushes the price of hive down, which again lowers the ceiling, and pushes HBD down even more.

Calling that anything other than a negative feedback loop is wrong.

In the end, what matters most is not the leverage 1.1x, but the total supply of HBD. If we have tens of millions of dollars to be repayed, then hive better be worth much more than that. The fear is that we create too much HBDs while we all think HIVE is going to $100, then find ourselves with tens of millions to pay back and hive back down below 100 million in marketcap.