Yes, the bitcoin rainbow chart is an actual thing. So, the next time someone asks you to count the rainbows and not the thunderstorms, you think crypto. To be more specific, you think bitcoin. Enough digressing; the bitcoin rainbow chart is a novel yet highly reliable way of visualizing the historical price action of bitcoin.
Also termed the BTC rainbow chart, this investor-friendly tool is replete with historical price moves, colorful bands, and zero tolerance for volatility. We might have exaggerated the last bit. But then, the bitcoin rainbow chart gives an unadulterated take on the BTC price — keeping the daily volatility out of the mix. And it uses a statistical model — furthering its credibility as a reliable bitcoin price evaluating tool.
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Let’s get straight to what the bitcoin rainbow chart is and how to use it.
In this guide:
- The need for a bitcoin rainbow chart
- Understanding the bitcoin rainbow chart
- The history of the bitcoin rainbow chart
- Bitcoin rainbow chart: pros and cons
- Logarithmic regression underpins the rainbow
- How does the rainbow chart work?
- Reading the bitcoin rainbow chart
- Supporting indicators for the BTC rainbow indicator
- Bitcoin rainbow chart vs. stock-to-flow
- How “reliable” is the rainbow chart?
- Is there an ethereum rainbow chart around?
- Rainbows and sunshine: the way we look at bitcoin
- Frequently asked questions
The need for a bitcoin rainbow chart
Bitcoin came to fruition in 2009 — amid glaring concerns and a hotbed of volatility. And while most technical analysis tools like moving averages, Bollinger bands, etc., were used to determine the buy-sell levels, navigating price fluctuations continued to be challenging.
Challenges like these beckoned the need for a scientifically vetted tool that would give a bird’s-eye view of the BTC price action. Bitcoin rainbow chart happened to be one such tool, helping users plan their long-term trading and investing gigs.
Understanding the bitcoin rainbow chart
The bitcoin rainbow chart is a tested and mathematically credible tool that uses colored bands for determining key trading zones. And yes, it is appropriately illustrated as a rainbow. Unlike other trading charts, the BTC rainbow chart superimposes the historical price pattern on a rainbow-like logarithmic chart — cutting out volatility and misinformation in the process.
Way too much jargon? Here is a simplified version:
Remember exponential growth? A line/ chart that starts slowly and peaks after a certain level.
Now consider an inverse of this — a logarithmic line that starts fast and continues to flatten out over time. Furthermore, both exponential and logarithmic lines continue to move away from the X-axis — changing the peaks and throughs for every bull/bear cycle.
Elements of a bitcoin rainbow chart
Hey, didn’t we mention something about “Colored Bands?” We sure did, as the BTC Rainbow chart comprises multiple colored bands — blue, the lowermost band, and dark red, the uppermost band.
Here are all the elements of a rainbow chart and what they mean to you as an investor:
- Dark Red: Extreme FOMO, likely to dip/bubble territory
- Red: Overbought zone; profit booking advisable
- Dark Orange: Buyers in charge and FOMO building rapidly
- Light Orange: Balanced territory with buyer-seller impasse
- Yellow: A BTC hodler territory
- Light green: BTC price currently in the buy zone
- Green: Price sale ongoing; accumulation zone
- Light blue: Evident buy zone
- Blue: Bearish run at the counter
As seen, each band means something or the other to investors. Currently, BTC is trading in the blue zone— a “Fire Sale” area referred to by a Twitterati.
None of this should be taken as investment advice. You should always DYOR (Do-Your-Own-Research) before proceeding.
The history of the bitcoin rainbow chart
The rainbow chart considers historical and current prices for plotting. However, the chart itself has a history. The BTC rainbow chart was the brainchild of Azop (a Reddit user), who formulated the same in 2014.
It started as a fun chart but quickly attracted eyeballs. Once the chart became popular, Trolololo — a Bitcointalk user — paired it with Logarithmic Regression in 2014 — giving it form and purpose in the process.
Here is the official version of the Rainbow Chart, featured on Blockchaicenter.net. Just so you know, a third player— Uber Holger— fine-tuned and developed the chart further, eventually uploading the same on the Blockchain Center.
Bitcoin rainbow chart: pros and cons
The BTC rainbow chart is a powerful tool. Yet, like any other chart-specific resource, it has its share of pros and cons:
- Have been accurate since the launch
- Uses a credible statistical model (logarithmic regression)
- Handy when it comes to looking at the long-term price development sans the noise (volatility)
- Easy to understand, even as a standalone indicator
- Devoid of daily volatility and noise
- Not fit for gauging short-term price trends
- The chart needs more time to mature
- Not a future price predicting tool
Logarithmic regression underpins the rainbow
Logarithmic regression is a statistical modeling technique used to evaluate a rapidly growing/decaying process that slows down over time. Growth of infants, the acidity of a solution, and sound intensity as some of the functions best represented by logarithmic regression.
Simply put, it is a method used to analyze and establish relationships that a standard linear line cannot represent. In the case of bitcoin, the price of BTC (massive initial growth) and the elapsed time cannot be related via a linear line, calling for the need for logarithmic regression.
But the question is: how does logarithmic regression fit into the rainbow chart narrative?
The original chart— released by Azop — was all about color coding the price action, as part of a linear line. The logarithmic regression chart from Trolololo combined nicely with Azop’s chart — developing the insight-filled rainbow chart we currently use.
Chart without Logarithmic regression
See how the price moves 10x, and the days for achieving the same keep going up. That is what we call flattening/slowing growth.
How does the rainbow chart work?
The rainbow chart has the following uses:
- As a standard band-specific investment zone predictor
- Determining price reversals when used with moving average indicators
- Finding the profit booking zone, provided you use it with specific trend indicators
- Outlining potentially overheated (overbought) zones
- Discovering potential future in terms of accumulating BTC at discounted prices
If you plan to use the Rainbow chart as it is, you can get a broader picture by looking at the price and which color band it is currently housed in. More about that in the next section.
Reading the bitcoin rainbow chart
Reading the bitcoin rainbow chart is easy. As it uses historical price data, you can see that every price move since 2014 would fall in a specific region(s) of the rainbow chart.
Right in the middle, we have the central yellow zone, which serves as the starting point of the chart. Color bands over and under the yellow band are termed deviations.
As BTC moves into the warmer zones (reds and oranges), investors start considering the prices to be in the bubble territory. Profit booking usually follows when BTC rests in these warmer zones for a while.
For instance: BTC was in the “Light Orange” zone on 8 Nov. 2021. The price was holding $67,492. BTC eventually saw some sharp profit booking over the next few months.
Sell-off at the warmer zones like red and orange mean that the BTC is trading higher than its fair value and in the “Bubble Zone” territory.
On the contrary, BTC moving towards the green and blue bands (cooler regions) signify buying sentiments and accumulation. We can expect BTC to be available at discounted prices in these regions.
For instance: BTC was in the blue zone during the crash of 2020 when the prices dropped as low as $5000. According to the BTC rainbow chart, this is the “Fire Sale” zone and is perfect for accumulation.
According to the current price levels, BTC is in the blue zone, which is basically a fire sale, according to the Rainbow Chart.
However, unlike the crash of 2020, where the prices nearly touched the bottom of the blue band, the current price positioning seems a tad higher. Meaning that the bottom of this bear market might still be in the offing.
Supporting indicators for the BTC rainbow indicator
As powerful as the rainbow chart on its own, it works even better with the following indicators:
1. Volume indicators
Sideway movements on the rainbow chart are quite common. In the long term, the prices do not always drop or surge at a moment’s notice. Therefore, as an informed investor, you might consider pairing the rainbow chart with a volume indicator to preempt the dips, surges, and pullbacks.
On-Balance volume and Accumulation and distribution indicators are the best volume-specific tools to use with the rainbow chart.
On Balance Volume as the low-dwelling blue line and Accumulation and Distribution Indicators as the green line.
2. Trend indicators
Trends can help you fine-tune long-term investment strategies. For instance, if you know where the price is heading in the short term, it is possible to use the rainbow price bands better. For instance, if the trend signifies rangebound price action, it is better to hold the horses as the price, even on the rainbow chart, would be moving sideways for a while.
In case of an uptrend, where the price (in the short-term) scales higher highs, there might be a sharp move up from the existing color band or even within the same color band.
The RSI (Relative Strength Index), Bollinger Bands, and MACD (Moving Average Convergence/Divergence) are some more reliable trend indicators to go with the rainbow chart.
3. Sentimental indicators
The rainbow chart works particularly well with the Bitcoin Fear and Green Index — an indicator that measures social sentiments, short-term price volatility, market volume, search trends, and market dominance.
Bitcoin rainbow chart vs. stock-to-flow
Bitcoin stock-to-flow chart is yet another reliable price forecasting indicator. However, it differs from the rainbow chart across a few key aspects. While the rainbow chart considers the historical prices and logarithmic regression to determine a fair value zone for those prices, the stock-to-flow model takes the price and BTC scarcity into account.
The stock-to-flow chart for BTC comprises two major factors: the stock or the total BTC supply (21 million) and the flow or the periodic mining rate. Unlike the rainbow chart that follows a price-based model, stock-to-flow takes the bitcoin halving cycles into consideration. As the BTC mining rewards reduce by half, the stock-to-flow ratio is expected to increase (as flow reduces). Therefore, the stock-to-flow ratio increases with each halving, taking the prices higher with it.
Simply put, the BTC rainbow chart focuses on the price, whereas the stock-to-flow chart focuses on scarcity. This point of view is what relates bitcoin to a commodity.
How “reliable” is the rainbow chart?
The rainbow chart has been accurate since its inception. To date, the prices haven’t skewed away from the concerned zones, be it during the bull market or during the bearish phases. To verify, you might cross-check the price forecast from the stock-to-flow model during any halving cycle and see which zone the price belonged to during that time.
White horizontal lines are the halving points. Notice how discounted the BTC prices were during the halving cycles and how they moved up after the event.
Is there an ethereum rainbow chart around?
Yes, much like BTC, the concept of the rainbow chart applies to other crypto assets as well. Here is the latest Ethereum Rainbow Chart for your reference:
BTC rainbow is more popular as it is the oldest crypto around, with a higher number of price points available as reference.
Rainbows and sunshine: the way we look at bitcoin
In summary, the bitcoin rainbow chart is effective when it comes to forecasting long-term price movements. It tracks market sentiments, segregates price moves into specific zones, and has been fairly accurate to date. Pair the rainbow chart with other indicators and have a mid to long-term price forecasting resource.
However, we wouldn’t go out on a limb and urge you to use this chart to predict the price of BTC. Instead, you are better off using it to track the overbought and oversold nature of the bitcoin ecosystem. And as they say: it takes sunshine (bull market) and rain (bear market) to make a rainbow.
Frequently asked questions
Is the Bitcoin rainbow chart reliable?
Is Bitcoin becoming less volatile?
How does the Bitcoin rainbow chart work?
What is a rainbow chart?
What is a halving?
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