Understanding Bitcoin’s price movements can be complicated. Many investors end up overwhelmed by countless financial charts that are difficult to understand for beginners. The Bitcoin rainbow chart aims to simplify things and reduce the barrier to entry for traders.
Instead of forcing people to rely on complicated numbers and technical indicators, the BTC rainbow chart offers a color-coded way to track Bitcoin’s potential and growth. It’s an easy way to visualize Bitcoin’s price trends, without the technical headaches.
So, how does the Bitcoin rainbow work, and how reliable is it?
The Bitcoin Rainbow Chart (Source: Blockchaincenter.net)
Imagine you’re planning on investing in Bitcoin as a beginner, but you have no idea when it’s the right time to dive in. You look up data online, but all the complex formulas and charts give you a headache. That’s where the BTC rainbow chart comes in.
This colorful, easy-to-understand tool breaks things down into color-coded segments. Each color band represents different market sentiments – from extremely positive to negative.
The concept was designed initially by a user (Trolololo) on the Bitcoin Talk Forum, and was gradually refined by numerous members of the Bitcoin community. Although it seems like a simplistic tool, the Bitcoin rainbow chart does have formulaic grounding. It’s a “logarithmic” chart – which plots Bitcoin’s price to capture its long-term trajectory more effectively than a linear scale.
The BTC rainbow chart is a simple technical analysis tool. It combines mathematical modeling with historical data visualization. The tool takes years of historical data, combines it with a regression curve, and then color codes the curve into bands, from blue to dark red.
Each of those bands represents a specific price range, helping users to identify when Bitcoin is overvalued, undervalued, and so on:
Dark Red: Overextended market (price likely to drop – maximum bubble territory)
Red: Bitcoin is overbought (traders might want to take profits)
Dark Orange: Buyers are highly active in the market.
Light Orange: The market is reasonably balanced.
Yellow: Investors should onto their coins.
Light Green: Bitcoin is cheap, so it might be time to buy.
Green: Bitcoin is very affordable.
Light Blue: The buying opportunity is strong.
Blue: Bitcoin is highly undervalued (Fire sale).
Historically, this chart has captured a lot of cycles quite accurately, from the 2017 bull run, to the 2021 all-time high for Bitcoin. However, the chart is based on historical data. It’s descriptive, not predictive, and can’t accurately identify every opportunity.
Using the BTC rainbow chart is straightforward. Traders simply match their strategy to buying, selling, and holding zones. When the chart shows Bitcoin in “cooler” color segments, like blue and green, this means it’s usually a good time to accumulate coins.
When Bitcoin trades move into the warmer bands, like orange and dark red, it indicates that it’s a good time to sell, thanks to the growing bubble and FOMO phases.
In the middle of the chart, when the price is neither particularly high or low, traders might decide to hold onto their coins. Notably, while the Bitcoin rainbow is a helpful tool – it’s not perfect, and should usually combine with other insights.
The chart only offers a single snapshot of the market. That’s why most traders combine insights with technical analysis indicators, like RSI, moving averages, and on-chain data. Plus, it’s worth remembering that black swan incidents can always disrupt established trends. Since the chart is based on historical data, it can’t always account for every outcome.
The Bitcoin rainbow chart isn’t the first or only tool investors have used to identify price opportunities. There are plenty of other options, such as:
Stock-to-Flow (S2F) Model: The S2F model looks at the ratio of the current stock of Bitcoin to the flow of new production. It’s used to predict Bitcoin’s long-term price. While the S2F model is also focused on long-term valuation, it emphasizes scarcity rather than historical price bands.
PlanB’s Power Law: This approach applies a power law to quantify Bitcoin’s valuation. Like the rainbow chart, it tries to understand the growth trajectory of the coin. However, it can sometimes result in more optimistic projections.
Mayer Multiple: The Mayer Multiple compares Bitcoin’s current price to its 200-day moving average. It is a more dynamic, short-to-medium term indicator that can complement the long-term perspective provided by the Rainbow Chart.
Each model has its merits. The BTC rainbow chart is a simple, visual tool, while other models offer different perspectives into market dynamics. Most traders will end up using a combination of options when making buying and selling decisions.
Just like any investment tool that gains rapid popularity, the rainbow chart has sparked a few misconceptions. The most problematic ones include:
Using the Rainbow Chart Guarantees Profits: Nothing in the crypto world can guarantee profits – because no technical tool or analysis is foolproof. The chart is just one resource that traders can use to make strategic decisions – but it’s not infallible.
Using the Rainbow Chart Works in All Market Conditions: Again, the BTC rainbow chart is based on historical data, which means it can’t account for events it hasn’t encountered. Black swan events can still disrupt the chart’s underlying assumptions.
The Rainbow Chart is a Short Term Trading tool: Realistically, the chart is intended for longer-term investors who want to get a better insight into market trends.
If you want to use this chart, there are a few websites you can visit to access it. The most popular option is the BlockchainCenter.net website, where you can find a dynamic version of the chart with live updates. There’s also the TradingView platform, which offers custom versions of the rainbow chart uploaded by users.
LookIntoBitcoin is another good option, with live views of the chart similar to the Blockchain Center website. There are also various variations of the chart available across the web, through Blockchain forums, and so on.
The important thing to remember is to combine what the chart is saying at any given moment with additional research. Don’t just “Buy” when the chart hits the cooler colors. Combine insights from multiple sources to make the right decision.
The Bitcoin Rainbow Chart is a popular and often accurate tool for understanding Bitcoin price trends. It definitely makes it easier for beginners in the market to understand when it makes sense to buy and sell crypto, without having to dive too deep into technical analysis.
However, like any tool, the chart does have its limitations. It can’t account for events it’s never encountered, and it doesn’t guarantee profits. Savvy traders should always combine the insights they get from this chart with additional indicators and research.
Still, if you’re new to the crypto space and you’re looking for an easier way to get to grips with market trends, the rainbow chart is a valuable resource. Check it out the next time you’re wondering whether to buy, sell, or hold your coins.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.
Flipster Crypto Weekly (April 17)
Next ArticleBitcoin Market Cycles and Global M2 Money Supply: A Historical Analysis
