How to Read Bitcoin Price Trends with Rainbow Charts? A Practical Guide

Bitcoin Rainbow Chart (Bitcoin Rainbow Graph) is a tool that combines entertainment and analytical value. This chart uses a series of color bands to mark different market stages, helping traders track long-term trends in Bitcoin prices. In this guide, we will delve into the core principles of this analytical tool, practical application methods, and why many traders highly regard it.

Core Mechanism of the Rainbow Chart: How Colors Map Market Sentiment

The rainbow chart is essentially a technical analysis tool that plots Bitcoin’s historical price movements on a logarithmic scale. Its unique feature is the use of nine different color zones, each representing a specific market assessment state.

Based on the current Bitcoin price around $89.02K, this chart clearly shows:

Dark Blue (“Almost Fully Sold”) — Extremely undervalued
Light Blue (“Buy! Buy! Buy!”) — Severely undervalued
Green (“Accumulation Continues”) — Relatively undervalued
Light Green (“Still Cheap”) — Slightly undervalued
Yellow (“Hold Steady”) — Fairly priced
Orange (“Is This a Bubble?”) — Possibly overvalued
Light Red (“FOMO is High”) — Clearly overvalued
Red (“Sell! Seriously, Sell!”) — Severely overvalued
Dark Red (“Super Bubble Peak”) — Extremely overvalued

This color scheme is based on a logarithmic regression curve algorithm, which smooths out short-term price fluctuations, allowing you to see the long-term evolution of Bitcoin price.

From Reddit User Creativity to Industry Standard Tool

The origin of the rainbow chart has an interesting history. The concept was first proposed by Reddit user “azop” in 2014, initially as a simple logarithmic price chart with color zones.

The real innovation occurred in 2019 when Bitcoin enthusiast Rohmeo made significant improvements to the original model, releasing Rainbow Chart V2. This update gave the chart a classic “rainbow” appearance and refined the underlying mathematical formulas, making the color band boundaries more scientific and rational.

Today, you can find real-time versions of this tool on platforms like BlockchainCenter, TradingView, and others.

Practical Application: How to Use the Rainbow Chart for Decision-Making

To effectively utilize the Rainbow Chart for trading analysis, you need to master this four-step framework:

Step 1: Precisely identify the current price’s color zone
Open the chart and zoom to an appropriate scale. Hover your mouse over the current price point to confirm which specific color band Bitcoin is in. For example, at $89.02K, determine whether it falls within the yellow fair zone or leans toward the orange overvalued zone.

Step 2: Interpret market signals based on color intensity
Cool colors (dark blue to green) suggest potential buying opportunities, as the asset is relatively undervalued. Warm colors (orange to dark red) indicate caution, possibly signaling profit-taking.

Step 3: Compare horizontally with historical cycles
Compare the current price position with past performances within the same color zones. Observe how Bitcoin’s price evolved from that zone in previous market cycles to identify patterns.

Step 4: Use multi-indicator confirmation
Do not rely solely on the rainbow chart. Also consider volume, RSI, MACD, and other technical tools. You can also combine it with models like Stock-to-Flow for long-term price forecasts.

This multi-dimensional analysis greatly reduces the risk of making incorrect decisions based on a single signal.

Reading Bitcoin Price Deeply Through Colors

Each color zone on the rainbow chart conveys key investment information:

• In the Blue-Green (Accumulation) zone, the market signals undervaluation. This is a rational investor’s window to consider building positions, suitable for long-term holding preparations.

• The Yellow (Balance) zone indicates Bitcoin’s price is at a relatively reasonable historical valuation level. Position decisions here should be more based on personal risk preferences than chart suggestions.

• The Orange-Red (Overvaluation) zone is a warning stage. These zones often correspond to market FOMO and retail investors chasing gains. Historically, such phases often precede market corrections.

Each color layer acts like a snapshot of market sentiment, helping you understand and respond to market changes from a macro cycle perspective.

The Practical Value and Limitations of the Rainbow Chart

As an analytical tool, the Rainbow Chart has notable advantages:

Strengths:

• Strong visual expression — color coding makes complex price movements immediately understandable without complex calculations.

• Provides a long-term perspective — covers Bitcoin’s entire historical price evolution, suitable for investors focusing on big cycles.

• Easy to use — even beginners can quickly grasp what each color represents.

• Decision support — when combined with other technical indicators, it enhances the reliability of your trading system.

• Educational value — observing behaviors within different color zones helps systematically learn Bitcoin’s market cycle characteristics.

Limitations:

• Historical data constraints — based on past data, but cannot guarantee that historical patterns will repeat exactly. Market environments are constantly evolving.

• Model simplification — the nine-color system cannot encompass all factors influencing price, such as regulatory changes or macroeconomic shocks.

• Parameter variability — different versions of the chart may use slightly different thresholds, leading to biases in interpreting “overvaluation” or “undervaluation.”

• Not suitable for short-term trading — designed for long-term analysis; limited in capturing intraday volatility.

• Market evolution — as Bitcoin markets mature, the relevance of historical patterns diminishes. The chart may require periodic adjustments to remain effective.

How Halving Events Leave Traces on the Rainbow Chart

Bitcoin halving occurs roughly every four years, reducing miner rewards by 50%, tightening new coin supply. This event has an interesting intrinsic connection with the Rainbow Chart.

Historically, around halving dates, Bitcoin’s price tends to be in the lower zones of the rainbow chart — deep blue or light blue undervaluation areas. This suggests that market participants anticipate supply constraints and may position themselves early.

In the months to a year after halving, Bitcoin’s price often experiences an upward cycle. As supply pressure materializes and demand potentially increases, the price may gradually rise from undervalued zones into yellow or even orange zones. This upward trajectory reflects the market psychology shift from “undervalued” to “price correction.”

While halving does not directly determine price movement, it provides historical context that helps you better understand Bitcoin’s price cycle logic.

Key Reminder: The Rainbow Chart Is Not a Crystal Ball

When using this tool, keep in mind:

• It is a retrospective tool, not a prediction magic wand. It is based on historical patterns, but history does not repeat exactly.

• Black swan events (unexpected extreme market shocks) can break the assumptions of the logarithmic regression.

• Markets are constantly evolving; past effective patterns may not hold in the future.

• The rainbow chart is best used in conjunction with other technical indicators; relying on it alone carries risks.

The ideal approach is to treat the Rainbow Chart as a reference tool within your trading system, not an absolute truth. Use it to calibrate your long-term trading mindset, but remain moderately skeptical of daily decisions.

Summary

The Bitcoin Rainbow Chart combines logarithmic regression with color coding to provide traders with a unique window into market cycles. It helps you quickly assess whether Bitcoin is undervalued or overvalued, offering valuable insights for long-term planning.

Whether you are a newcomer to crypto assets or an experienced trader, this tool can play a role in your analytical framework. But remember, no single perfect tool can precisely predict the market. Combining the rainbow chart with other technical analysis methods, continuous learning of market patterns, and maintaining a rational investment attitude is the right approach for investors.