If someone put in a long position for 10K BTC at $3.50 and Bitcoinica bought 10K BTC at $3.50, as long as no one is putting in a short position to counter that they will not sell the 10K BTC that they purchased. The reason they were liquid before is because lots of people were taking up contrary positions, but if everyone starts going the other way then they would stop allowing people to go long until/unless they get more actual USD with which to buy additional BTC.
Now, that doesn't explain why someone who took a short couldn't liquidate at a loss, which is the more confusing/problematic issue at hand. If Bitcoinica is out of USD because everyone goes long and I come along and put in a short at $4.30 or whatever, then if I chose to liquidate that short at a loss right after taking the position there's no reason to not allow that.
Now, that doesn't explain why someone who took a short couldn't liquidate at a loss, which is the more confusing/problematic issue at hand. If Bitcoinica is out of USD because everyone goes long and I come along and put in a short at $4.30 or whatever, then if I chose to liquidate that short at a loss right after taking the position there's no reason to not allow that.
If you liquidate your short position, you are still buying. It's the same as opening a long position.
Practically, this is a problem, and I don't really know how real world brokerages resolve this problem. I only know that some forex brokers actually trade against their clients.
This is the real issue, and has unfortunately been drowned out by cypherdoc. I believe it solution is to treat a short position like you are treating a long position.... You won't sell the bitcoins out from under the longs, don't sell the USD out from under the shorts. They are effectively holding dollars, and you sold their dollars.
he will have to if the price keeps rising.
