Master the long-term trend of BTC from scratch using the Bitcoin Rainbow Chart

Do you want to find a simple and intuitive tool to determine whether Bitcoin is overvalued or undervalued? The Bitcoin Rainbow Chart is exactly such a tool. It presents Bitcoin’s long-term price evolution using colorful banded regions, allowing you to quickly see which phase of the cycle the market is in.

Currently, BTC is priced at $88.99K, with a 24-hour increase of +1.67%. At this moment, understanding long-term price trends becomes especially important.

What exactly is the Rainbow Chart? How does it work?

The Bitcoin Rainbow Chart is a technical analysis tool that displays Bitcoin’s price history on a logarithmic scale. Unlike traditional candlestick charts, it uses multiple colors to mark different market phases, each representing a specific valuation range.

The core algorithm of this tool is based on a logarithmic regression curve. This method smooths out Bitcoin’s sharp price fluctuations, helping you see clearer long-term trends — which is the key difference from short-term volatility.

Color and Market Phase Correspondence:

Deep blue area (“Almost all sell-offs”) indicates Bitcoin is severely undervalued, suggesting a potential bottom. Light blue area (“Buy buy buy”) shows the asset is significantly undervalued. Green regions mark accumulation phases, where the asset is slightly undervalued. Light green indicates prices still attractive for buying.

Yellow regions represent fair valuation, with the market in equilibrium. When the price enters the orange area, signs of overheating appear. Light red reflects FOMO-driven price increases. Red and dark red warn of severe overvaluation, indicating risk zones.

How was this tool created?

The Rainbow Chart story began in 2014. A Reddit user “azop” first proposed the idea — displaying Bitcoin prices with color stripes on a logarithmic scale. The initial version was relatively simple, but the concept was solidified.

2019 marked a turning point. User Rohmeo made significant upgrades based on the original idea, launching Rainbow Chart V2. This update gave the chart its iconic “rainbow” appearance and optimized the underlying mathematical algorithm and color boundaries. Today, the charts you see on BlockchainCenter, TradingView, and other platforms are derivatives of this version.

How to practically apply the Rainbow Chart? Four quick steps

Step 1: Identify the current price zone

Open the chart and locate the latest Bitcoin price point. Trace along the y-axis to see which color region the price falls into. This step provides your initial judgment of the current market valuation.

Step 2: Interpret color signals

Cool tones (blue-green) generally suggest undervaluation opportunities. Warm tones (orange-red) hint at potential risks. But colors are just the first layer of information, not the final conclusion.

Step 3: Trace historical cycles

Compare the current price position with past similar regions. You’ll notice an interesting pattern — Bitcoin tends to enter upward cycles after staying in blue-green zones; after peaking in red zones, it often undergoes corrections. This regularity is part of the chart’s appeal.

Step 4: Combine with other tools

Using the Rainbow Chart alone isn’t enough. Pair it with RSI to check overbought/oversold conditions, use MACD to confirm trend direction, and examine trading volume to support price movements. Multi-dimensional analysis makes your decisions more robust. Advanced users may also combine the Rainbow Chart with the Stock-to-Flow model for long-term investment planning.

What do different regions on the Rainbow Chart represent for BTC price prediction?

Blue-Green Zone (Accumulation Phase)

When Bitcoin is in these regions, the market shows clear signs of undervaluation. This is a golden period for long-term holders to consider building positions. Historical data shows most bull market initiations start from these zones.

Yellow Zone (Rational Valuation)

Prices here indicate a balanced market. You can hold your positions with confidence, without rushing to buy high or sell low. This region marks the boundary between rationality and irrational exuberance.

Orange-Red Zone (Bubble Warning)

Once the price enters these warm colors, risk signals are flashing. FOMO is driving prices up, but fundamentals may not have caught up yet. It’s time to consider taking profits or exercising caution.

Each region acts like a thermometer of market sentiment. Blue means cold, red means hot. The key is recognizing that these extremes usually don’t last long.

The relationship between Bitcoin halving and the Rainbow Chart

Bitcoin undergoes a halving approximately every four years, cutting miners’ rewards in half, which creates supply pressure. Interestingly, halving events often correlate with certain price positions on the Rainbow Chart.

Historical review shows that before and after halving, Bitcoin’s price often stays in the lower half of the chart (blue-green zones). This suggests, from a historical regression perspective, the asset is generally undervalued. During the post-halving cycle, as supply tightens and demand increases, prices tend to gradually rise, moving upward on the chart.

This evolution from “undervalued” to “fairly valued” and then to “overvalued” provides valuable context for understanding Bitcoin’s market cycles. Of course, halving doesn’t guarantee price increases, but it offers a useful historical reference framework.

The real advantages and limitations of the Rainbow Chart

Advantages

The biggest strength of this tool is its intuitiveness. No complex calculations needed — colors tell you the market state. It offers a broad historical perspective, showing Bitcoin’s entire price trajectory from inception to today. Beginners can quickly grasp it, while experienced traders can gain new insights. When combined with other indicators, it can reinforce your trading strategies. Observing price behaviors across different periods also helps you learn about market cycles.

Limitations and risks

The Rainbow Chart is a retrospective tool based on history. Past performance doesn’t guarantee future results — the market may break existing patterns. The logarithmic regression used smooths noise but can overlook black swan events. The color boundaries are subjective; different analysts might interpret them differently. Most importantly, this tool is suited for long-term analysis, not short-term trading. As the market evolves, historical patterns may need adjustment and recalibration.

The key point: don’t rely solely on any single tool. The Rainbow Chart is best used as a supplement in your analysis toolbox, not as the sole decision-maker.

Quick FAQ

Can this tool predict future prices?

No. It is based on historical data; past trends do not guarantee future performance. It can guide your general direction but shouldn’t be used for precise predictions.

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

Not recommended. It is designed to smooth out short-term fluctuations and highlight long-term trends. Short-term noise can mislead you.

BTC is now at $88.99K, should I buy or not?

It depends on the region shown on the chart. If the current position is in green or yellow zones, consider accumulating. If it has entered the orange-red zone, be cautious. But this is just a reference; always consider your risk tolerance and overall strategy.

Why are there different versions of the Rainbow Chart?

Because the algorithm parameters and boundary definitions vary. This is a feature and a limitation of the tool. Choosing a reliable source and sticking with it is advisable.

Summary

The Bitcoin Rainbow Chart is an interesting and practical tool for understanding Bitcoin’s long-term price evolution. It uses rainbow-like color layers to present market cycles, making complex data easier to digest. From historical context to practical application, from halving relationships to limitations, the full picture of this tool should now be clear.

But remember: charts are helpers, not prophets. Its greatest value lies in helping you build an understanding of market cycles and providing historical reference for your decisions. In actual trading, always combine other technical indicators, fundamental analysis, and risk management principles. As Bitcoin markets continue to evolve, you should also adjust how you use such tools. Use the Rainbow Chart well, along with other tools, and you’ll navigate Bitcoin’s turbulent waters more confidently.