Before I got a longarm, I used Vanish, the water soluble thread from Superior Threads, to baste a large quilt before quilting on my DSM. After I got the Innova, while I was still trying to figure out how to keep a quilt nice and square during quilting, I tried using Vanish before quilting with "real" thread. That experiment did prove that I could quilt on the longarm with Vanish, but I had to go slowly since it's a very fine thread and prone to breakage, and I learned that there are easier ways to keep the quilt square. (The other thing I had to remember was not to wet the thread when threading it through the needle - duh!)
You're right that basting stitches (unless with a thread like Vanish) need to be taken out as the quilting is done, just as basting pins need to be removed.