I for one will be pretty disappointed if in a few years people can still make money shorting BTC and DDoS'ing exchange front-ends.
This is why Bitcoin is essentially a pyramid scheme. People are gonna get burnt. The Vancouver ATM shows the authorities still don't know what they're dealing with and how to apply the laws already in place in this area.
It's exactly the opposite -- it's lack of an ability to quickly turn bitcoins into regular currency, and slowness of transaction processing, that has a chance of dooming the whole enterprise. As it stands, these are constraints on growth, and an incentive to develop and use alternatives.
BTW, the "flash crash" term is usually used to refer to transitory liquidity events followed by equally fast recoveries, rather than regular busts after which price tends to stay depressed for a while, which seems to be what you are talking about here.
The same way he purchased stock he could not sell of. Time elapsed between the buying and the selling.
"When this hypothetical selloff occurs, who will buy his bitcoins?"
Who buys stock during a sell-off? There will be people who believe that Bitcoin will rise again, and who see a chance to profit from that.
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Regards from Munich,