We have an interesting event coming up - on the next downturn, many new speculators will cash out and will demand money from exchanges. Some of the exchanges aren't going to make it.
Why would the exchanges not have the required funds to pay out? If you sell your bitcoins on an exchange, there must be a buyer with fiat on the exchange ready to buy it.
They're supposed to, but all they're really doing is exchanging ExchangeBTC for ExchangeUSD and then processing withdrawals, but only for those who request it. A significant amount of money is stored on exchanges because banks suck and it takes a long while to actually move fiat around. To that significant group of people, it makes sense to keep some money on exchanges long-term for short-term trading.
An exchange can have $10M in ExchangeUSD IOUs, but actually only have $5M in USD to pay out. This fractional reserve system (or in this example, probably insolvency) works so long as there isn't any kind of "bank run" on the exchange.
MtGox and BTC-e (maybe BTC-e still does - Idunno) used to have "code money." That is, you could withdraw fiat and BTC in the form of GoxUSD or GoxBTC - debt notes, represented by a hash, similar to Bitcoin. You could trade these notes around, and they offered excellent advantages, but also the very serious drawback that Gox may not honor the IOUs. These IOUs, it should be noted, are effectively the same as the balance you see in your account on an exchange -- they're not necessarily representing actual money. When Gox started issuing these IOUs as a withdrawal method, there was a very slight premium over face value due to the convenience they offered. However, when Gox's future started looking uncertain, GoxUSD and GoxBTC started trading at a discount under face value. This was because the debt notes (the same as account balances in exchange accounts) may not have been fully backed by Gox's reserves. Gox eventually discontinued issuing these debt notes due to regulations.
Since when were Gox a fractional reserve bank? You have proof of this?
To have USD on Gox, you have to have deposited USD.
Even if you deposit BTC and sell then withdraw, there was a buyer that has USD on Gox. You can imagine any convoluted scenario you like, but it all boils down to the fact that the dollars in Gox, in peoples accounts, are dollars that were deposited by one person or another.
It's a closed loop, and over time as all the BTC moves back and forth Gox skims a percentage off the top. Daily volume gives you a good idea of the ballpark of how much they make.
Now, if they are doing anything untoward with that cash like speculating themselves then that is a serious problem (As well as being totally stupid, because why kill the golden goose!).
If the running costs are so high that they outweigh the commissions, then we have a serious problem.
The only decision a rational investor has to make, is whether you believe that Gox is trustworthy. The recent move towards 'regulation' in the USA and now China looks to be a good thing in this respect. Whilst Gox isn't under US jurisdiction, I think the precedent being set here means that Japan won't be too far behind.
Then we will all see whether Gox's Golden Goose is alive and well.
