What Is the Bitcoin Rainbow Chart, and How to Use it?

The Bitcoin Rainbow Chart is a fun yet informative tool. You can use it to track Bitcoin’s long-term price trends. The chart uses a range of colors to show different market phases. In this article, you will learn what the Bitcoin Rainbow Chart is, how it works, and why many traders find it useful. You will also discover its history, benefits, and limitations.

 

The Bitcoin Rainbow Chart is a technical analysis tool. It shows Bitcoin’s price on a logarithmic scale. The chart uses colored bands that stretch across the price history. Each color represents a different market phase.

 

The original Bitcoin rainbow price chart | Source: BlockchainCenter

 

• Dark Blue ("Basically a Fire Sale"): Extremely undervalued​

• Cyan ("BUY!"): Highly undervalued​

• Green ("Accumulate"): Undervalued​

• Light Green ("Still cheap"): Somewhat undervalued​

• Yellow ("HODL!"): Fairly valued​

• Orange ("Is this a bubble?"): May be overvalued​

• Light Red ("FOMO intensifies"): Probably overvalued​

• Red ("Sell. Seriously, SELL!"): Highly overvalued​

• Dark Red ("Maximum Bubble Territory"): Extremely overvalued​

These colors help you quickly see the overall market sentiment. The chart uses historical data. It relies on a logarithmic regression curve to smooth out Bitcoin’s wild price swings. This method gives you a long-term view of price trends.

 

When Was the Bitcoin Rainbow Chart Created?

The Bitcoin Rainbow Chart first appeared in 2014. A Reddit user named “azop” came up with the idea. It started as a simple chart with colored bands on a log scale.

 

The new Bitcoin rainbow chart (V2) | Source: BlockchainCenter

 

In 2019, a Bitcoin user called Rohmeo improved the model. The updated version is known as Bitcoin Rainbow Chart V2. This upgrade gave the chart its distinctive “bow” shape. It also refined the mathematical formula behind the colors. Today, many websites like BlockchainCenter and TradingView display these charts.

 

You can use the Bitcoin Rainbow Chart in several ways. Here is how you get started:

 

1. Identify the Current Price Band: Zoom in on the chart. Hover your cursor over the price line. Check which color band the price falls into.

2. Interpret the Color: Look at the color. Cooler colors (blue and green) mean Bitcoin may be undervalued. Warmer colors (orange and red) mean it might be overvalued.

3. Study Historical Trends: Compare the current band with past cycles. See how Bitcoin’s price behaved when it was in the same band before. This helps you spot patterns.

4. Combine With Other Indicators: Use the Rainbow Chart with other tools. Look at trading volume and technical indicators like RSI or MACD. This combination helps you make better decisions. You can also combine the Bitcoin rainbow chart with Bitcoin Stock-to-Flow (S2F) model for long-term price forecasts. 

Using the chart is simple. It offers a clear visual guide to long-term market trends. However, it is best used as a tool for planning, not for exact predictions.

 

How to Interpret the Bitcoin Rainbow Chart for BTC Forecast

How to use Bitcoin rainbow chart for BTC price forecast | Source: CoinGlass

 

The Rainbow Chart provides you with key insights. Here is what each section tells you:

 

• Blue to Green Zones (Accumulation): The market shows signs of undervaluation. This is a time to consider buying. You may find a good entry point for a long-term hold.

• Yellow Zone (Fair Value): Bitcoin appears reasonably priced. The market is balanced. You might hold your position during this phase.

• Orange to Red Zones (Overvaluation): These bands indicate rising enthusiasm and possible overheating. Prices may be too high. This is a warning to take profits or be cautious.

Each color band is a signal. They help you decide when to buy, hold, or sell. Remember, the chart is a guide. It reflects historical trends, not future certainty.

 

By using the Rainbow Chart, you gain a tool that complements your overall analysis. It is useful for both new and experienced traders. The Bitcoin Rainbow Chart offers several benefits, including: 

 

• Visual Clarity: The color bands make it easy to understand market trends at a glance. You do not need complex calculations.

• Long-Term Perspective: The chart shows historical price movements. It gives you a broad view of Bitcoin’s evolution.

• Simple to Use: Beginners appreciate its straightforward design. You can quickly learn to interpret the signals.

• Supports Decision Making: When you combine the chart with other technical analysis tools, it strengthens your trading strategy.

• Educational Value: The chart helps you learn about market cycles. You see how Bitcoin behaves during different phases.

The accuracy of the Bitcoin Rainbow Chart is a topic of debate. Here are some points to consider:

 

• Historical Data: The chart is based on past price movements. It fits historical data well. However, past trends do not guarantee future results.

• Logarithmic Regression: The regression smooths out volatility. This helps you see long-term trends. But sudden market shifts or black swan events may not follow the curve.

• Subjective Parameters: The color bands are not set in stone. Different models may use varying thresholds. This can lead to different interpretations.

Overall, the Rainbow Chart works as a general guide. It is best seen as an approximation rather than a crystal ball. Use it along with other tools for a balanced view.

 

Bitcoin rainbow halving price regression chart | Source: Bitbo

 

Bitcoin halving is a major event that occurs every four years. It cuts the BTC mining reward in half, reducing the number of new Bitcoins created. This process creates scarcity and can boost demand over time.

 

The Rainbow Chart often mirrors these changes. You might notice that Bitcoin's price falls into the lower bands around the time of a halving. This suggests that the asset is undervalued or trading at a discount based on historical trends.

 

After a halving, Bitcoin's price has, in some cases, moved upward over the next market cycle. As demand grows and supply tightens, the price can climb into the higher bands on the Rainbow Chart. This upward move may reflect a transition from a period of undervaluation to one of overvaluation.

 

You should use this insight to better understand Bitcoin's market cycles. The relationship between halving events and the Rainbow Chart adds valuable context to the asset's long-term price behavior. However, always remember that halving does not guarantee a specific price outcome. Instead, it provides an additional layer of historical context to help guide your analysis.

 

While the chart is a handy tool, it has limitations. Consider these points:

 

• Retrospective Tool: The chart is based on historical data. It does not predict future events with certainty.

• Simplistic Model: The Rainbow Chart uses a simple color-coding system. It does not account for all market factors like regulations or global events.

• Subjective Nature: The boundaries between color bands can vary. Different analysts may have different views on what constitutes “overvalued” or “undervalued.”

• Not for Short-Term Trading: The chart is best for long-term analysis. It may not capture short-term volatility. Use other indicators for day-to-day trading decisions.

• Market Evolution: As Bitcoin’s market matures, past trends may change. The chart might need adjustments to remain relevant.

Keep these limitations in mind. Use the Rainbow Chart as part of a broader toolkit. This approach helps you make informed decisions.

 

You now have a beginner-friendly guide to the Bitcoin Rainbow Chart. The chart uses a range of colors to show long-term price trends. You learned about its origins and how to use it. You saw how the chart reflects market sentiment and its relation to Bitcoin halving.

 

The Bitcoin Rainbow Chart offers clear visual insights. It supports long-term planning and education. However, it has limitations. It works best when combined with other technical indicators and market analysis tools.

 

Always remember that no tool is perfect. Use the Rainbow Chart to complement your research. Stay informed and be ready to adjust your strategy. With this guide, you are better equipped to navigate Bitcoin’s market cycles.

 

• The Bitcoin Stock-to-Flow (S2F) Model: A Comprehensive Guide

• Bitcoin Price Prediction 2024-25: Plan B Forecasts BTC at $1 Million by 2025

• The History of Bitcoin Bull Runs and Crypto Market Cycles

• MicroStrategy's Bitcoin Holdings and Purchase History: A Strategic Overview

1. What is the main purpose of the Bitcoin Rainbow Chart? 

The chart gives you a long-term view of Bitcoin’s price trends using colored bands. It helps you see if Bitcoin is undervalued, fairly valued, or overvalued.

 

2. Can I use the Rainbow Chart for short-term trading?

The Rainbow Chart is best suited for long-term analysis. It smooths out short-term volatility. For day-to-day trading, consider other indicators.

 

3. How does Bitcoin halving affect the Rainbow Chart?

Halving events reduce the mining rewards and create scarcity. Historically, Bitcoin tends to be in lower bands around halving time, then climbs over the cycle. This trend adds useful context to the chart.

 

4. Is the Bitcoin Rainbow Chart reliable for predicting future BTC prices?

It is important to keep in mind that no single tool can predict the future with certainty. The Rainbow Chart is based on historical data. Use it as a guide along with other technical analysis tools.