Rainbow Chart Bitcoin: A Practical Guide to Analyzing Long-Term Price Trends

The Bitcoin rainbow chart has become a favorite tool for traders seeking to understand long-term market cycles. Using an intuitive color system, this tool offers a unique perspective on Bitcoin’s valuation compared to its historical trends. If you’re unfamiliar with the rainbow chart or want to learn how to use it effectively, this article will guide you through each aspect.

Bitcoin Rainbow Chart: Understanding Its Basic Mechanism

The rainbow chart is a data visualization that displays Bitcoin’s price on a logarithmic scale with colored bands spanning its entire price history. Each color represents a different valuation zone, helping traders quickly assess whether Bitcoin is undervalued, fairly valued, or overvalued based on historical patterns.

The color system in the rainbow chart consists of the following zones:

• Dark Blue: Indicates extremely undervalued conditions (“Basically a Fire Sale”)
• Cyan: Very cheap, strong buy signal (“BUY!”)
• Green: Affordable price but starting to rise (“Accumulate”)
• Light Green: Still reasonably cheap with room for growth (“Still cheap”)
• Yellow: Bitcoin reaching balanced valuation (“HODL!”)
• Orange: Entering potentially overvalued territory (“Is this a bubble?”)
• Pink: FOMO sentiment starting to dominate (“FOMO intensifies”)
• Red: Highly overvalued, sell signal (“Sell. Seriously, SELL!”)
• Dark Red: Reaching maximum valuation (“Maximum Bubble Territory”)

The foundation of the rainbow chart is a logarithmic regression that smooths out extreme Bitcoin volatility. This mathematical approach allows traders to look beyond daily noise and focus on long-term fundamental trends.

Historical Development: How the Rainbow Chart Evolved

The rainbow chart first appeared in 2014 when a Reddit user named “azop” created a simple visualization with colored bands on a logarithmic scale. The initial concept was basic but revolutionary—using colors to indicate different market phases.

A significant innovation came in 2019 when Rohmeo, a Bitcoin community contributor, updated the original model to Rainbow Chart V2. This update provided a more refined, curved visual shape that became its signature. The mathematical formulas behind the color assignments were also improved, making interpretations more consistent.

Today, leading analysis platforms like BlockchainCenter, TradingView, and CoinGlass offer accessible rainbow chart visualizations. Its popularity continues to grow as traders seek intuitive ways to understand Bitcoin’s historical valuation.

How to Use the Rainbow Chart for Trading Decisions

Using the rainbow chart is simpler than you might think. Here’s a step-by-step guide to start leveraging this tool in your analysis:

1. Determine the Current Price Position

Open the rainbow chart on your preferred platform. Zoom in on the chart and place the current Bitcoin price on it. For example, as of February 20, 2026, Bitcoin is around $67,740, which you can use as a reference to identify its valuation zone.

2. Interpret the Color Signal

Cooler colors like blue and green indicate Bitcoin is undervalued—these are accumulation signals for long-term investors. Conversely, warm colors like orange and red suggest high valuation and potential market overheating.

3. Compare with Previous Cycles

Don’t just look at the current position. Observe how Bitcoin moved when it was in the same color bands during previous market cycles. These patterns provide valuable context about possible future movements.

4. Combine with Other Tools

The rainbow chart is most powerful when used alongside other technical indicators. Watch trading volume, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence) for confirmation. You can also incorporate the Bitcoin Stock-to-Flow (S2F) model for more robust long-term price predictions.

This combined approach ensures you’re not relying on a single metric but using a more holistic perspective for decision-making.

Evaluating the Reliability of the Rainbow Chart: How Accurate Is It?

A common question is whether the rainbow chart can reliably predict Bitcoin’s price. The answer is complex and requires understanding its limitations.

Strengths of the Rainbow Chart:

• Based on solid historical data, it aligns well with past Bitcoin price movements.
• Logarithmic regression effectively dampens wild volatility, giving a clearer view of fundamental trends.

Limitations to Acknowledge:

• Past data does not guarantee future results. Sudden market shocks (black swan events) or global regulations may not be predicted by the rainbow chart.
• Color thresholds are not absolute—different models may set different boundaries, leading to varying interpretations.

In summary, the rainbow chart functions best as a general guide and educational tool rather than an absolute predictor. Use it within a broader analysis framework, not as the sole basis for trading decisions.

Connecting the Rainbow Chart with Bitcoin Halving: A Repeating Pattern

Bitcoin halving events—occurring roughly every four years and reducing mining rewards by half—have an interesting relationship with the rainbow chart. Historically, around halving times, Bitcoin tends to be in the lower bands (blue to green) of the rainbow chart.

This isn’t coincidental. Halving creates scarcity, boosting long-term valuation potential. Investors often buy during these periods, pushing prices into higher bands in the following months. You can observe this pattern: Bitcoin prices enter undervalued zones around halving, then gradually rise into yellow, orange, and red zones as the market cycle develops.

Understanding this relationship adds valuable context. Halving isn’t a guarantee of specific price outcomes but provides a historical framework to inform your rainbow chart analysis.

What You Should Know: Limitations of the Rainbow Chart

While powerful, the rainbow chart has limitations you should understand before relying on it fully:

• Retrospective Nature: It reflects past data, not a guaranteed forecast.
• Simplified Model: Color zones don’t account for all market variables—regulations, institutional adoption, geopolitical events, or fundamental changes can shift markets beyond the chart’s predictions.
• Subjective Interpretation: Boundaries between colors can vary depending on the analyst, leading to inconsistent readings.
• Not Ideal for Short-Term Trading: Designed for long-term analysis, it doesn’t capture daily volatility or intraday movements well. For active trading, other responsive indicators are necessary.
• Evolving Markets: As Bitcoin matures and markets become more integrated globally, historical trends may become less predictive. Future adjustments to the rainbow chart parameters might be needed.

Recognizing these limitations makes you a wiser trader. Use the rainbow chart as one component within a larger analysis toolbox.

Advanced Application Strategies: Maximizing the Rainbow Chart

For traders wanting to go further, here are some advanced ways to utilize the rainbow chart:

Combine with Bitcoin S2F Model: The Stock-to-Flow model offers a predictive framework that complements the rainbow chart. When both indicators align, confidence in the signal increases.

Multi-Timeframe Analysis: While designed for long-term, you can analyze monthly versus weekly data to gain different resolution insights into current market phases.

Track Valuation Evolution: Record how Bitcoin’s price moves between color zones throughout a cycle. These patterns often repeat, helping you anticipate upcoming phases.

Integrate with Fundamental Analysis: The rainbow chart works best when combined with fundamental insights about adoption, regulation, and institutional inflows.

Conclusion: The Rainbow Chart as Part of Your Analytical Arsenal

The Bitcoin rainbow chart is a powerful tool, but it must be understood within the right context. It provides an intuitive visualization of Bitcoin’s historical valuation and helps traders grasp market cycles from a long-term perspective.

Its main advantages are simplicity, accessibility, and historical consistency. However, it’s not a crystal ball—its limitations and uncertainties should always be kept in mind.

The best strategy is to incorporate the rainbow chart into a broader analytical framework. Combine it with other technical indicators, fundamental analysis, and solid risk management. With this holistic approach, you’ll be better equipped to navigate Bitcoin’s volatility and complex market dynamics.

Remember: no single tool is perfect. Stay informed, keep learning about market evolution, and be ready to adapt your strategies as conditions change. The rainbow chart is a good compass, but you must set your own course.