So this has the same flaw that Predictious has. It's building a BTC bank in addition to a prediction market.

That's the easiest thing to build, coming from a world of traditional fiat money banking. But BTC enables something superior - 2of3 transactions between betters. We create a 3 way transaction - Long says "I want the money". Short says "I want the money". When the bet is concluded the arbitrator says "Long won, give me 1%."

The arbitrator can never go insolvent - in fact, the arbitrator never needs to hold a single bitcoin.