[tarnacious_]

I understand bitcoin are traded like this but it doesn't address this issue the parent raises. Also if you are trading through an exchange like this you are likely exposed to even greater risks.

If you buy some bitcoin from an exchange and you don't get the bitcoin in an address you control, you are effectively buying an IOU for the bitcoin. The value of the IOU depends not only on the value of bitcoin but also on the exchanges willingness/ability to repay it.

If the exchange doesn't own a similar amount of bitcoins as they have sold IOUs, at the current market value they couldn't possibly repay the IOUs they issued a month ago. If a significant amount of people they have issued IOUs want to redeem them, then they will surely need to sell some bitcoins to repay the IOUs they have issued.

By using a futures market they could limit their exposure price changes when buying or selling coins they don't have, but these markets are quite young and it's certainly not clear how much risk these exchanges are exposing themselves to.

As you apparently understand this better than we do, what do you think will happen on these exchanges if the value of bitcoin starts falling rapidly?