Short selling does help reduce the amount of large price gains that are not supported by the fundamentals (and will eventually lead to a crash). If the prices does not rise too fast and does not crash then more people will want to start using bitcoin over time that will lead to greater long term prices.
Any time you don't have the keys, you are trusting those who do. I can't believe I have to remind anyone here about that.
Access to depositors' coins give market manipulators LEVERAGE.