Why is a yellow watch crystal so bad? What does it do the watch mechanism, face and hands?

The original plastic crystals that yellow have a nasty habit of outgassing as they age. If not changed out in time, the chemical reaction can corrode the hands, and eventually the watch movement itself.

Regards! Mark

That's right Mark, the decomposing plastic crystals release chlorine and fluorine among other things, both of those are nasty acid gases.

Ed and Mark are both correct, some people will say the plastic is hydroscopic, if that was the case you could take a yellowed crystal turn it upside down over a cup and pour water in and eventually a drip would form on the other side (this never happens). Some plastics were made of nitro-cellulose and other materials and they have low UV resistance, when exposed to sunlight/uv radiation over it's lifetime the chemical bonds start breaking down.

Anything outgassing is trapped between the dial and crystal, on the outside any outgassing just goes off into the atmosphere. The hands are fine enough that anything slightly acidic or basic will start the corrosion process and at times it will attack the exposed pivots.

nitrocellulose link

But the main part is stated here also

Polyester is much more resistant to polymer degradation than either nitrate or triacetate. Although triacetate does not decompose in as dangerous a way as nitrate does, it is still subject to a process known as deacetylation, often nicknamed 'vinegar syndrome' (due to the acetic acid smell of decomposing film) by archivists, which causes the film to shrink, deform, become brittle and eventually unusable

The short point is when yopu have a yellowed watch crytsal, remove the crystal ASAP! A new crystal may not be available right then, but the watch is better off with no crystal at all.

As for the explanation of how "yellowed" crytstals cause of the 100% destruction of the watch hands they "protect", I am guilty as referring to the "War Plastic" (Cheap Cellophane) watch crystals as "Hygroscopic".

Please note the definition of HYGROSCOPY;

"Hygroscopy is the ability of a substance to attract and hold water molecules from the surrounding environment. This is achieved through either absorption or adsorption with the absorbing or adsorbing material becoming physically 'changed,' somewhat, by an increase in volume, stickiness, or other physical characteristic of the material, as water molecules become 'suspended' between the material's molecules in the process.
A common example where differences in hygroscopy can be seen is a cellophane plastic-laminated paperback book cover. Often, in a suddenly-moist environment, the book cover will curl away from the rest of the book. The unlaminated side of the cover absorbs more moisture than the laminated side and increases in area, causing a stress that curls the cover toward the laminated side."

When I was manufacturing small high output servos for remote control systems, we made them with Hygroscopic Nylon 66 which we then "Steam Hardened" which "tempered" the Nylon due to the absorption of the water to a certain depth in the injection molded part.

In the case of watches you have a different effect, the crystals will actually absorb or outgas water molecules to try and maintain a "balance" with surrounding atmospheric humidity levels. These "war plastic" crtystals therefore guaranteed a standard level of humidity inside the watch with their own action of absorption-outgassing. The next step was carrying reactant O2 into that atmosphere which was replenished as it was used up rusting the heck out of the hands.

That is my explanation.

Dave it isn't hygroscopy, since you would have to have nearly 100% humidity nearly all of the time. If as you say the moisture pull would be to the inside of the crystal then at times you would see moisture condensation of some sort in the space between the crystal and dial, this I have never seen unless I did like one of my cheap Swiss watches it dropped out of my pocket onto the the driveway knocking the bezel off and rolled under my lab when he was peeing.

Since moisture "pull" is always toward the lower humidity a typical watch would not be subjected to a high enough humidity level to get he impact you are talking about.
Yes you could get high himidity level in a heavy rains but but nothing close to heated steam as you mention. Even specially create silicates will absorb water but can never absorb it to a higher level than the atmospheric humidity at some point it reaches equilibium because it has limited capacity to absorb. When was the last time you saw water dripping from a moisture absorbing silicate pack?
If as you said the plastic is porous enough to allow H2O penetration then taking a dial as I mention and filling it with DI-H2O would eventually lead to moisture or a drop on the underside.
Second point at some point for the level of humidity to be high enough to start the rusting process at some time you would see trapped condensation between the dial and crystal.
On your laminate example you are not taking the coefficient of expansion of two different materials into effect or the contacting effect (shrinkage) of the laminate that changes as it cures/ages.
Film crazing (from shrinkage) can be easily seen in old tube radios that used nitrocellulose lacquer as the finish. UV caused the bonds to break down and the finish would shrink and craze with was commonly called alligatoring.
In many of these old yellow crystals (worst offenders) you will see them heavily cracked/crazed and water would not cause this but bond breakdown would.
Just like many plastics will outgas (new car smell), this outgassing is rarely water vapor (since pure water is tasteless and ordorless) and in some cases if contained in a sealed enviroment are quite harmful.