How does the Rainbow Chart of Bitcoin help navigate the cryptocurrency's price cycles?

Rainbow Chart of Bitcoin is an intriguing tool that simultaneously entertains and provides valuable insights. It visualizes long-term price movements of Bitcoin through a system of colored bands, where each shade corresponds to a specific market phase. Today, many traders use it to gain context when analyzing global trends.

How the Bitcoin Rainbow Chart Works: Basic Principles

The foundation of the Bitcoin Rainbow Chart is a logarithmic scale, which smooths out sharp price fluctuations of the cryptocurrency. This allows for a clearer picture of long-term movements. The chart uses nine color ranges, each indicating a particular market condition:

• Dark Blue (“Almost Sold Out”) — Bitcoin is extremely undervalued
• Light Blue (“BUY!”) — Strongly undervalued state
• Green (“Accumulating”) — Signs of undervaluation
• Light Green (“Still Cheap”) — Slight dip from fair value
• Yellow (“HODL!”) — Bitcoin is trading at a fair price
• Orange (“Is This a Bubble?”) — Early signs of overvaluation
• Light Red (“FOMO is Growing”) — Likely overvaluation
• Red (“Sell. Seriously, SELL!”) — Significantly overvalued price
• Dark Red (“Maximum Bubble Territory”) — Extreme overvaluation

The current Bitcoin price ($88.36K with a daily increase of +0.82%) occupies a certain position on this spectrum. The color system allows quick assessment of the price range and the stage of the market cycle the asset is in.

History and Evolution of the Tool

The first version of the Bitcoin Rainbow Chart appeared in 2014, when Reddit user “azop” experimented with logarithmic regression to analyze price trends. It was a simple but effective tool.

A significant improvement occurred in 2019 when trader Rohmeo released an updated version — Bitcoin Rainbow Chart V2. This update not only gave the chart its characteristic “rainbow” appearance but also substantially improved the mathematical basis of the color scheme. Today, this tool is available on BlockchainCenter and TradingView platforms, where millions of analysts use it.

Practical Application: Step-by-Step

Using the Bitcoin Rainbow Chart requires no special skills. Here’s the algorithm:

First step — determine your current position: Open the chart and find the latest price point. Hover over the price line to identify the color zone it’s in. This shows the market’s condition relative to historical standards.

Second step — interpret the signal: Cool tones (blue, green) indicate potential undervaluation, which could be a buy signal. Warm tones (orange, red) suggest possible market overheating.

Third step — analyze historical patterns: Study how Bitcoin behaved when it was in the same color zone previously. This helps identify recurring market behavior patterns.

Fourth step — combine with other tools: Don’t rely solely on the rainbow chart. Use it alongside indicators like RSI, MACD, trading volume, and the Stock-to-Flow model (S2F). This comprehensive approach makes your analysis more justified.

What the Color Zones Mean for Trading

Each colored band on the chart carries a specific market message:

Blue and Green zones (accumulation period): The market shows signs of undervaluation. This is a period when it makes sense to consider long-term holding positions. The probability of finding a good entry point is higher.

Yellow zone (fair value): Bitcoin is moving within a reasonable valuation range. The market is in balance. At this stage, it’s advisable to maintain current positions without rushing.

Orange and Red zones (overvaluation period): These bands indicate growing market enthusiasm and possible overheating. Prices may deviate significantly from fair value. This is a signal to take profits or exercise increased caution.

Advantages of Using the Tool

The Bitcoin Rainbow Chart is useful for both beginners and experienced analysts for several reasons:

Visual accessibility: Color coding allows immediate understanding of the overall market direction without complex calculations. It democratizes technical analysis.

Long-term perspective: The chart covers Bitcoin’s entire history and shows how the price has evolved through various market cycles. This helps grasp the scale of what’s happening.

Ease of learning: Beginners quickly learn to interpret the color zones without studying complex formulas. The tool is so intuitive that it can be used by people of any skill level.

Decision support: When combined with other technical tools, the rainbow chart strengthens your trading strategy and increases confidence in your decisions.

Educational value: The chart is an excellent resource for studying cryptocurrency market cycles and Bitcoin’s history. It shows how the asset behaved at different stages of development.

Important Limitations and Practical Reality

Despite its usefulness, the tool has significant limitations that should be considered:

Retrospective nature: The rainbow chart is based on past data. Historical trends do not guarantee future repetitions. The market evolves and adapts.

Simplified model: The chart uses a simple color-coding system that does not account for many market factors: regulatory changes, geopolitical events, macroeconomic trends, or technological shifts.

Subjectivity of boundaries: The exact values at which each color zone begins or ends are not absolute. Different versions of the chart may use different thresholds, leading to interpretative variability.

Unsuitability for short-term trading: The tool is designed for analyzing long-term trends. It smooths out short-term volatility, so it’s not suitable for day trading. For short-term decisions, use other indicators.

Market evolution: As Bitcoin’s market becomes more mature and institutionalized, past trends may lose relevance. The chart may require regular adjustments to stay pertinent.

The Relationship Between Bitcoin Halving and the Rainbow Chart

Bitcoin halving is a key event that occurs approximately every four years. During halving, the mining reward is cut in half, reducing the rate of new Bitcoin creation and creating a scarcity effect.

The rainbow chart often reflects this cycle. Historically, Bitcoin’s price tends to be in the lower color ranges (blue, green) near halving periods, indicating relative undervaluation. After halving, as demand grows with limited supply, the price has historically moved upward in the next market cycle, often transitioning into higher color bands.

This pattern adds contextual understanding to the long-term Bitcoin price cycles via the rainbow chart. However, it’s important to remember that halving does not guarantee any specific price outcome — it simply provides historical context that can aid analysis.

Questions About Accuracy and Forecasting

The accuracy of the Bitcoin Rainbow Chart is often discussed within the community. Key points to understand:

The logarithmic regression underlying the chart indeed helps identify long-term trends, filtering out short-term noise. However, sudden market shocks or “black swans” can disrupt historical patterns and push the price outside the expected ranges.

No tool, including the rainbow chart, can serve as a crystal ball for absolute future price predictions. It should be viewed as a rough guide that complements a broader set of analytical tools.

Conclusion: Using the Chart in Context

The Bitcoin Rainbow Chart remains a useful tool for gaining a long-term perspective on cryptocurrency price trends. Its color system makes analysis accessible and intuitive, and its historical application demonstrates some predictive value.

However, maximum usefulness is achieved only when the chart is used in conjunction with other technical indicators, fundamental analysis, and an understanding of market cycles. Consider the Bitcoin Rainbow Chart as a supplement to your research, not as the sole source of signals.

In the constantly evolving crypto market, stay flexible and ready to adjust your strategies based on new data and changing conditions. With this comprehensive approach, you will be better prepared to navigate Bitcoin’s price cycles and other digital assets.