Why is that a reasonable assumption?

It's a good question. Long or short how do they hedge their own position ?

I'm the founder of Bitcoinica.

1. The assumption seems justified, but not exactly true. In the past month (since launch), we have 60% of the days of net long and 40% days of net short.

2. Initially, we only support USD deposits/withdrawals, and this imposes a problem of "no one to short to" described by the OP. However, we have added BTC deposits/withdrawals shortly after launch. Many customers use Bitcoin as their margin to trade, so we have Bitcoins to sell when there're short positions.

3. Generally, our overall position is very balanced. Our reserve is about $X0,000 and X,000 BTC at the moment. Average net position reserve ratio is about 25%. (X > 4)

We have detailed statistics and metrics available for analysis. Currently Bitcoinica's platform is very healthy financially.

Thank you for your support!

Yes. Net short simply means Bitcoinica holds less Bitcoins than our customers' account balances.