Synthetic Volatility

Definition ∞ Synthetic volatility refers to market price fluctuations that are not directly caused by genuine supply and demand dynamics for an underlying asset, but rather by the trading of derivative products or structured financial instruments. This volatility can be generated through complex strategies involving options, futures, or perpetual swaps, which can amplify price movements. It often arises from cascading liquidations or algorithmic trading strategies reacting to minor price shifts. Such manufactured volatility can distort true market sentiment.
Context ∞ Crypto news often discusses synthetic volatility in the context of highly leveraged derivatives markets and their impact on spot prices. Reports analyze how large positions in futures or options can create feedback loops that exacerbate price swings, particularly during periods of market stress. The phenomenon is a subject of regulatory concern, as it can contribute to market instability and potentially harm less experienced traders.