That is an unsustainable though, those reserves are not infinite. Travel backward in time, when bitcoins were $0.01 and imagine you had gone long (1:1) with 100 BTC. That required someone else to go short for $1. Now BTC are $6 each; and you are worth 200*6 = $1200; at some point that shorter was liquidated, losing their $1; but that leaves us $599 lacking in the fund pool.
Mr. Long buys 100 BTC for $10.
There's no Mr. Short! So Bitcoinica backs this by going to Mt. Gox and physically buying 100BTC with $10 from its reserve.
A year later, Mr. Long cashes out his position of 100 BTC for $6 each - for a total of $600 minus the $10 from the original long position.
Bitcoinica sells those physical 100BTC for $600, passing $590 to Mr. Long and putting the remaining $10 back into its reserve.
The numbers balance.
This is the very definition of the problem. Bitcoinica has to do exactly this for every long and every short. The imbalance is not the only thing that needs backing, every position needs backing as the shorts only cover the longs to their margin; and the profit for the long can exceed that margin.
The only problem here is that Bitcoinica doesn't have infinite funds to lend out. Their funds aren't at risk; when all positions liquidate, the reserve is just as big as it was when there were no positions at all. They just don't have the capital to materialize an unlimited number of positions.
I don't think their funds are at risk when people liquidate. The liquidates are easy. The problem is the profits.
Ah, I think I comprehend now. You're right about even balanced positions having to be backed; you can't balance longs and shorts without holding the reserve just in case
one or the other pulls out first.
But then, it still works. Mr. Long's position is backed by USD from the reserve being traded for BTC. Mr. Short's position is backed by BTC from the reserve being traded for USD.
There's still no risk. There's still no betting against the users or having to foot the bill for profits (since the "buys" and "sells" underlying the longs and shorts are all, at least theoretically, executed on the market). All Bitcoinica is doing is lending money for people to use to make a profit, and collecting whatever they loaned out when the position is liquidated - whether by choice or by force.
What am I still missing here?