Bitcoin Rainbow Chart: What Is It & How To Read It

The Bitcoin Rainbow Chart helps investors understand when Bitcoin may be undervalued or overvalued based on historical data. Learn more about how it works.

What is the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a long-term valuation tool that uses the colors of the rainbow to provide a visual representation of Bitcoin’s price movements over time.

At its core, it’s a logarithmic price chart, which means it plots Bitcoin’s price on a logarithmic scale to better capture its long-term growth trajectory. The chart is overlaid with a series of color bands, each representing a different phase of the Bitcoin market cycle.

Read next: What is the Crypto Fear and Greed Index?

How does the Bitcoin Rainbow Chart work?

The chart works by taking years of historical data and applying a logarithmic regression curve. This curve is then color-coded into bands ranging from blue (the lowest) to dark red (the highest).

Each color band represents a different price range, and the position of Bitcoin within these bands can give you a quick snapshot of whether it’s considered overvalued, undervalued, or somewhere in between based on historical trends.

Dark red: The market is extremely overextended, and the price is likely to drop.
Red: Bitcoin is overbought, and traders might want to consider taking profits.
Dark orange: Buyers are dominating the market, and FOMO (fear of missing out) is in full swing.
Light orange: The market is balanced, and there’s no clear indication of whether to buy or sell.
Yellow: Investors should hold their Bitcoin, as it’s neither overvalued nor undervalued.
Light green: Bitcoin is relatively cheap, making it a potential buying opportunity.
Green: A good time to accumulate more Bitcoin.
Light blue: A very good buying opportunity.
Blue: Bitcoin is highly undervalued, indicating a potential market bottom.

How to use the Bitcoin Rainbow Chart

The idea is pretty straightforward: When Bitcoin is in the cooler colors (blue and green), it might be a good time to buy. These colors suggest that Bitcoin is undervalued compared to historical trends. Conversely, when Bitcoin is in the warmer colors (red and dark red), it could be a signal that the market is overheated and it might be wise to take some profits.

However, it’s crucial to remember that the Bitcoin Rainbow Chart is not a crystal ball. While it’s a handy tool for visualizing long-term trends, Bitcoin is a highly volatile asset, and past performance doesn’t guarantee future results. The chart is based on historical data, and there’s no guarantee that Bitcoin’s price will continue to follow the same patterns in the future.

Bitcoin halving and the Bitcoin Rainbow Chart

Another key aspect of the Bitcoin Rainbow Chart is its relationship with Bitcoin’s halving events. For those new to the concept, Bitcoin halving occurs approximately every four years, reducing the reward miners receive for adding new blocks to the blockchain by half. This event is significant because it decreases the rate at which new Bitcoins are created, potentially creating scarcity and driving up the price.

Historically, the price of Bitcoin has tended to be in the lower bands of the Rainbow Chart around the time of a halving, before climbing towards the upper bands in the subsequent years. However, with only three halvings in Bitcoin’s history, it’s important to note that this pattern might not hold in the future.

Who made the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart was first introduced in 2014 by a user named "Trolololo" on the Bitcoin Talk forum.

Since then, a few members of the Bitcoin community have worked on refining the idea, resulting in the Rainbow Chart we know today. While it started as a somewhat tongue-in-cheek tool, it’s gained popularity as a way to visualize Bitcoin’s long-term price trends. You can view the current Bitcoin Rainbow Chart on a number of sites like Blockchain Center and TradingView.

Is the Bitcoin Rainbow Chart accurate?

The Rainbow Chart is a useful tool, but it’s not infallible. It’s based on historical data and assumptions, so while it can provide valuable insights, it shouldn’t be the only factor guiding your investment decisions. The market is influenced by countless factors, and the color bands don’t reflect the current market state or future price expectations with certainty.

That being said, the chart can still be a helpful reference point, especially for those looking to understand where Bitcoin’s price might be in its broader market cycle. Just remember, like any tool, it’s most effective when used in conjunction with other indicators and analysis methods.

Read next: Bitcoin Bull Run Strategies

How to use the Bitcoin Rainbow Chart in your strategy

If you’re a trader or investor, the Bitcoin Rainbow Chart can be a great addition to your toolkit. When the price is in the cooler bands, it might be a good time to consider accumulating more Bitcoin. On the other hand, when the price is in the warmer bands, it could be time to think about taking some profits.

But remember, the chart is best viewed as a long-term guide rather than a short-term trading signal. Bitcoin’s price can be incredibly volatile in the short term, so it’s important to keep the big picture in mind and not get too caught up in day-to-day fluctuations.