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What is the Bitcoin Rainbow Chart?

4.8
| by
Josiah Makori
-

What is the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a technical analysis tool that visualizes the historical price trends of bitcoin and predict its future price movements. It is a multi-colored chart that plots bitcoin's long term price movement on a logarithmic scale, with each color band representing a different price range, where blue is the lowest and dark red is the highest. 


Key Takeaways

  • The Bitcoin Rainbow chart uses a color-coded spectrum that denotes different price ranges, summarizing bitcoin's current position compared to past trends in an easy-to-read visual. 

  • The chart consists of nine distinct color bands, with the lowest price range denoted by blue and the highest price range symbolized by dark red.

  • You can use the Bitcoin Rainbow Chart to recognize potential entry and exit points based on the current bitcoin price within the color bands. 


What do Bitcoin Rainbow Chart colors mean?

While short-term traders generate most of the trading volume in the crypto markets, many individuals prefer to HODL crypto assets for the long term. These investors often strive to purchase bitcoin (BTC) at the end of a bear market and hold it for extended periods as the price appreciates, ideally selling towards the end of a bull market. 

The challenge is predicting the right time for entry and exit, and that's where technical analysis comes in. Analysts have created indicators and models to forecast future price movement and to understand bitcoin's historical price behavior. One of these tools is the Bitcoin Rainbow Chart, which helps investors understand bitcoin's current price in relation to its past and present market cycles.

How to Use the BTC Rainbow Chart

Cryptocurrencies are volatile, and values can rise and plunge over a few hours. However, if you consider bitcoin's logarithmic chart, you can see its evolution since inception against the dollar and a high tendency to increase in value throughout the years. Based on historical data, it has been often forecasted that hodling onto Bitcoin will eventually be profitable, riding out the market volatility.BTC price chart

To better illustrate the nuances of bitcoin's ascent, we can use the colors of the rainbow to divide it into different price phases, as visualized in the Bitcoin Rainbow Chart.

Bitcoin Rainbow Chart

Source: Blockchaincenter.net

With the color segments of the Bitcoin Rainbow Chart, you'll be able to see when bitcoin is oversold (blues and greens), or overbought (orange and red). These give investors an idea of when would be a good time to buy or sell BTC. When bitcoin is in the blue/green zone, it's recognized as a good time to accumulate the asset. On the other hand, when the price sits in the orange and red zones, it could be a good time to sell as bitcoin is entering a potential bubble, created by the excessive market demand. 

Beyond recognizing entry and exit points, the Bitcoin Rainbow Chart also illustrates the time value of money and the dollar, where what used to be considered expensive in the past now looks cheap in the present. For instance, in November 2013, purchasing 1 BTC at $1 seemed expensive, placing it in red zone. However, in 2017, BTC at $1 was considered a bargain, and it was classified under the blue zone. 

time value of money and the dollar bitcoin

The Bitcoin Rainbow Chart also accounts for Bitcoin Halving, which takes place every four years. The Halving is a key date within the BTC market cycle, as it cuts the amount of tokens mined by half, and this creates scarcity. This phenomenon is subsequently expected to drive demand for Bitcoin, leading to a price rally that peaks in the red zone, before the market undergoes a correction, bringing the price back down. Based on historical data from the previous 3 halvings, Bitcoin has indeed performed in a similar fashion.

Although the Bitcoin Rainbow Chart is not a foolproof indicator for predicting BTC's future price movements, it provides a historical context and a visual representation of the different market phases. You can use it along with other indicators and analysis methods as a reference point to make informed investment decisions. 

How to Interpret the Bitcoin Rainbow Chart

TThe BTC Rainbow Chart consists of 9 color bands, where each represents a different layer of Bitcoin's market cycle, and these bands make up a rainbow. Let's analyze each color band and how you can apply them in your investment decisions. That said, this article is not meant as financial advice, so do your own research before buying and trading digital assets.

Blue = Basically a Fire Sale

When the price of BTC is in the blue zone, the market experiences a significant dip or correction, and prices are relatively low compared to historical values. The color signals a potential buying opportunity, as it may be an excellent time to invest in BTC at a discounted price. However, it's essential for investors to research the dip's exact causes before entering and committing their capital. In addition, it should be noted that there are instances where the price dips into the blue zone but continues to drop further.

Blue-Green = Buy! 

The blue-green zone on the Bitcoin Rainbow Chart represents a slight recovery from a dip or correction. The market is showing signs of strength, and it may present an opportunity for investors to buy as the price rises. This color represents a good buying opportunity for investors looking to accumulate more bitcoins. For investors that think that the risk of buying in the blue zone is too high, given the precarious state and possibility of Bitcoin price going even lower, the price increase during the blue-green zones can help users feel more confident about the bitcoin price increasing in the near future.

Green = Accumulate

The green zone indicates BTC is trading at a fair value, and bullish investors can consider accumulating more coins. It signifies that BTC is in a stable phase, and its price is expected to increase gradually over time. For investors that are bullish on BTC, they can consider buying and holding in this phase.

Light Green = Still Cheap

The light green zone indicates that BTC is still undervalued relative to its historical price trend. This color signals a further opportunity to buy more BTC as its price is expected to increase as the market cycle continues.  During this period, it is likely that the cryptocurrency market will start to see the entry of more investors, and perhaps even the bigger institutions. However, investors should always remember that crypto market conditions volatile; hence, you should never invest more than you are comfortable losing. 

Yellow = HODL! 

The yellow zone on the Bitcoin Rainbow Chart represents a market phase where the focus changes from accumulating to holding onto BTC as an investment. The color signals that the asset is trading at a fair value and is expected to remain stable in the near future. Investors who are confident in Bitcoin's long-term potential may still choose to hold onto their coins at this stage instead of cashing out their profits. During this phase, the increase in Bitcoin price starts becoming more noticeable, drawing in the attention of more investors.

Light Orange = Is This a Bubble? 

The light orange zone indicates that the market may enter a speculative phase. It signals that bitcoin's price is increasing at an accelerated rate, where critics are labeling it a bubble. Investors should be cautious in this phase and may consider taking profits, especially in the case of active traders.

Orange = FOMO Intensifies

The orange zone on the Bitcoin Rainbow Chart represents a phase of the market where investors should be cautious. It signifies that bitcoin's price is rising at an unsustainable rate, and investors may be tempted to buy due to FOMO (fear of missing out) as the price rises. This phase is usually accompanied with a significant increase in new investors, especially investors who might not be well aware of what Bitcoin and cryptocurrencies are.

Red = Sell! 

The red zone on the Bitcoin Rainbow Chart represents a market phase where investors may consider selling their bitcoin investments if they're not looking to HODL long term. The band signals that bitcoin's price has reached an unsustainable level, and a market correction is expected. There is an opportunity here for investors to consider taking profits in this phase, especially if they have a significant amount of bitcoin. 

Dark Red = Maximum Bubble Territory

The dark red zone indicates that the market is in a bubble and the price of bitcoin is significantly overvalued. The band suggests that investors should be extremely cautious and may consider selling their bitcoin investments if they have invested for short-term gains. The market may experience a significant correction or crash, and investors who hold bitcoin in this phase may experience considerable losses. In addition, should investors decide to buy during this region, they should know the potential market correction that could follow, which historically has been more than 50% of the all-time-high prices.

Is the Bitcoin Rainbow Chart Accurate?

As mentioned, the Bitcoin Rainbow Chart visually represents bitcoin's historical price trends. It is intended to provide information that can help investors decide when to buy, hold, or sell bitcoin. While the chart can be a helpful tool for investors, it's essential to understand that it's not a perfect predictor of future market conditions. It's based on historical price trends and doesn't account for unforeseen events or market conditions that could affect bitcoin's price in the future.

Additionally, the Bitcoin Rainbow Chart is just one of many tools available when making investment decisions. It's essential to research and analyze multiple sources, including market trends, news articles, and also taking a look at on-chain data, before making any investment decisions. There are also many other technical analysis indicators that can be used, including Relative-Strength Index (RSI), moving averages (MA), Bollinger Bands and many more.

That said, the Bitcoin Rainbow Chart can be a helpful tool as it provides a quick snapshot of bitcoin's price relative to historical price trends, and can help investors decide when to enter and exit the market.

Overall, the accuracy of the Bitcoin Rainbow Chart depends on various factors, including market conditions, investor sentiment, and unforeseen events that could affect bitcoin's price. While the chart can be a helpful tool in indicating past trends and the related market sentiment, you should still do your own research with technical, on-chain, and fundamental analysis before committing to any investment decisions. 

Limitations of the Bitcoin Rainbow Chart

While the Bitcoin Rainbow Chart can be a helpful tool in informing investment decisions, it's important to note that it has its limitations. First, it's based solely on historical price trends and doesn't account for unforeseen events or market conditions that could affect bitcoin's price in the future.

Second, the chart's color zones are subjective and open to interpretation. The definitions of the colors may vary among different chart providers; for example, when the price was hovering at around $27.5K on April 22nd, lookintoBitcoin's Rainbow chart indicated that the price was within the lowest zone (blue), while blockchaincenter's placed it near the top of the next lowest zone (blue-green).

Thirdly, it doesn't take into consideration Bitcoin's underlying technology or the broader cryptocurrency market. While price trends can provide some insight into market sentiment, they don't necessarily reflect the long-term potential of a particular cryptocurrency or technology. This is especially the case in recent times, where the Bitcoin ecosystem has been seeing more use cases built on it, with the most recent example being Bitcoin Ordinals, BRC-20 tokens, and even sats names.

Finally, the Bitcoin Rainbow Chart is just one of many tools investors can use to make investment decisions. It's important to consider multiple sources of information, including market trends, news articles, and expert opinions, before making any investment decisions.

The History of the Bitcoin Rainbow Chart

The original Bitcoin Rainbow Chart was created by a Reddit user named Azop as a humorous way to display bitcoin's price history. Later, a BitcoinTalk user named Trolololo developed version 2.0 by pairing the rainbow chart with logarithmic regression. 

Logarithmic regression is the opposite of exponential growth and is commonly used to track change in various fields, including asset prices. The pairing made sense in the BTC context, as it takes more and more capital to push BTC higher, resulting in diminishing returns. 

Combining the Bitcoin Rainbow Chart with logarithmic growth makes the model applicable in the present and future. Additionally, it continuously adjusts based on new price data, which is intended to increase accuracy over time.

However, Eric Wall, an influencer who once popularized the Rainbow chart, has said that he is not serious about it and that investors should not take it as a source of truth. 

Other Rainbow Charts

The Ethereum Rainbow Chart

The Ethereum Rainbow Chart visually represents Ethereum's historical price trends, similar to the Bitcoin Rainbow Chart. Like the Bitcoin Rainbow Chart, the Ethereum Rainbow Chart is designed to help users make informed decisions about when to buy, hold, or sell Ethereum based on historical price trends.

Like the Bitcoin Rainbow Chart, the Ethereum Rainbow Chart uses a color-coded system to indicate different price levels. The chart typically features nine colors, each corresponding to a specific price range and investment strategy.

ETH Rainbow Chart

Source: Blockchaincenter.net

Conclusion

The Bitcoin Rainbow Chart is a visual tool for making informed decisions about when to buy, hold, or sell bitcoin. The chart provides a quick snapshot of bitcoin's price relative to historical price trends and can help investors identify potential buying or selling opportunities. When using the Bitcoin Rainbow Chart, beyond understanding each color band, investors should also should determine their investment goals and risk tolerance, and never invest more than they are comfortable losing. 

However, it's important to note that the Bitcoin Rainbow Chart is not a perfect predictor of future market conditions, and investors should not rely solely on it for investment decisions. The chart also comes with limitations, such as its reliance on historical price trends and subjective color coding, and investors should do their own research before investing in any digital assets. 

As always, this article is not intended as financial advice and is only provided for information purposes.

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Josiah Makori
Josiah Makori
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001

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