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I'm probably oversimplifying this or missing some crucial step but...

All your users by BTC at i.e. $10 and store them on your (Gox) exchange. Price jumps to +600 and you subsequently get 50k fiat withdrawal requests. Am I a total cluebie to wonder how they can fund such withdrawals? Maybe there isn't sufficient capital reserve or liquidity between BTC and fiat to withstand such demand?

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User that wants to buy BTC via an exchange:

* User deposits USD/EUR/etc into an exchange (such as MtGox)

* User places a "bid" to buy BTC at a certain price (USD/EUR/etc per BTC)

* User waits for their "bid" to be matched by the exchange to another user who has placed an "ask" to sell their BTC for USD/EUR/etc

So, the USD/EUR/etc being exchanged between users in an exchange is put there first by the users. The exchange itself does not front USD/EUR/etc; or at least it shouldn't.

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