One of the most popular and appealing tools to analyze Bitcoin (BTC) is the famous Rainbow Chart. Is it simply a meme or a valid indicator? Is it any good for analyzing the present and future? Read our article with the BTC rainbow chart explanation to learn all you need to know about it.
Key Takeaways
- The Bitcoin rainbow chart indicator is a popular long-term valuation tool for historical price analysis. The original Bitcoin rainbow chart was drafted by BTC enthusiasts in 2014 and adjusted over the years.
- This indicator overlays rainbow color bands on the logarithmic growth curve channel for Bitcoin’s price. Each band has its meaning, showing which specific price range corresponds to what market sentiment.
- As a technical analysis tool, it is useful to check the potential future price direction for Bitcoin’s price and highlight market sentiment. However, it is not a valuable tool to precisely forecast the future price of Bitcoin.
What is the BTC Rainbow Chart?
There is a good chance that you have seen this easily recognizable and memorable chart. The Bitcoin rainbow chart gets its name from the rainbow-colored band that follows the price history of Bitcoin.
Its shape follows a logarithmic regression curve, and the indicator is applied to the log scale. A logarithmic (log) scale is used to compactly present data in a non-linear way, especially when large numbers are present. A logarithmic curve charts the trajectory of growth, and “regression” here refers to the fact that this growth is slowing down.
The first drafts of the Bitcoin rainbow chart appeared around 2014, and the invention of it has been attributed to various anonymous forum posters. Since then, it has been adopted by many crypto influencers, many of whom made it their brand. Notable examples include Plan B and Rohmeo De.
As of 2024, there are a few rainbow chart models that use different formulas. The one above from Look Into Bitcoin uses an old formula and is not a perfect fit. There is also an alternative updated version of the rainbow chart retrofitted for the data from up until 2022:
Both of these charts have their reasons to exist, and we will explain why later. Before that, let’s get to the bottom of the iconic shape and the meanings of colored bands.
How to Interpret the Bitcoin Rainbow Chart
The rainbow chart band is divided into nine stripes which indicate different zones. Although the neighboring color zones are only slightly different, the top and bottom stripes basically represent opposite sentiments. The stripes have somewhat fixed labels that are used in every version of the rainbow chart.
They can be divided into three categories:
- Blue to green: accumulation zone. The blue stripe is usually referred to as “Basically a fire sale”, and the turquoise stripe calls “BUY!”. The next dark-green stripe is labeled “Accumulate”, and the light-green one “Still cheap”.
- Yellow to orange: fair value zone. The next area, starting with a yellow stripe, calls to “HODL!” In the light-orange area, Bitcoin is somewhat overheated, which is why it is called “Is this a bubble?” The brighter orange stripe indicates that BTC is on fire, and “FOMO intensifies”.
- Red: profit-taking zone. When Bitcoin is in the red area, it is deep in the overbought area and the sentiment is as greedy as it could be. This usually starts with the BTC price in the red area, which is labeled “Sell. Seriously, sell!”, and everything above that is the “Maximum bubble territory”.
What Does the Bitcoin Rainbow Chart Indicator Tell You?
The popularity of the Bitcoin rainbow chart clearly evidences that it is useful for something. However, it is far from being a universal indicator. It is not even a reliable tool for future price analysis, contrary to what its presentation may lead you to believe.
You can reliably use the BTC rainbow chart to:
- Gauge the sentiment on a short time scale — days to weeks. By referring to this indicator, you can check in which phase the Bitcoin market currently is.
- Validate entry and exit points. If you plan to buy or sell, refer to the rainbow chart to see if now is a good time. It is not a reliable indicator for establishing future opportunities because it is grounded in historical analysis and tends to ignore external factors.
- Analyze Bitcoin trends in the long term — weeks to months. Bitcoin rainbow chart is primarily a long-term planning tool and is not reliable or useful for short-term trading.
Summing up, the Bitcoin rainbow chart is best used for planning long-term investments. Its use of a log scale and long time frames makes it unfitting for short-term analysis. The BTC rainbow chart deals in long-term global trends and completely fails to reflect any short-term volatility.
How Accurate is the Bitcoin Rainbow Chart?
If you compare the older and newer versions of the rainbow chart in the previous sections, you will notice that they are different. In the classic version, the Bitcoin price chart does not strictly adhere to the price range. The newer version is clearly retrofitted to the historical data, and it shows the BTC price in a different area than the classic one. So which one is more accurate and is any of them wrong?
The thing with the rainbow chart is that it is best thought of as an approximation rather than a strictly technical indicator. For sure, it is grounded in cold hard math, but its appeal is in being easy to understand. Moreover, it helps to see the big picture and not focus on minute details.
The first logarithmic regression curve for Bitcoin from 2014 “predicted” that it would reach $100,000 by 2021. In 2022, at the bottom of this Bitcoin market cycle, some traders made it a big deal when the BTC price breached the lower band, and the model was declared “invalidated”. The model has been adjusted multiple times to account for the changes in the price history, so does it retain its accuracy?
As a tool for historical analysis, yes. As a predictive model, however, not quite. Surely, with years, it becomes a little more refined, as there is more historical data to go off from. But as some kind of long-term price prediction indicator, it has never been that accurate to begin with.
Conclusion
Evidently, the Bitcoin rainbow chart is more than a pretty band painted over the BTC price chart. It does not mean the opposite is true and it is not a precise projection of the future price trajectory. The truth of the rainbow chart’s purpose, unsurprisingly, lies somewhere in the middle.
What do you think about the Bitcoin rainbow? Is it a meme or do you swear by it? Let us and other crypto enthusiasts know in the comments on our social networks: X, Facebook, Reddit, and Telegram! Stay tuned to updates from the Bitcoin market and explore other crypto assets in our blog.
Frequently Asked Questions
What is the Bitcoin rainbow chart?
The Bitcoin rainbow chart is a technical indicator based on historical data for the long-term BTC price analysis. It can help understand how the current Bitcoin price corresponds to a phase of the Bitcoin market cycle.
Who created the Bitcoin Rainbow Chart?
The ideas behind the Bitcoin rainbow chart are attributed to different anonymous posters such as bitcointalk user Trolololo and Reddit user Azop. The best-known adopters of this indicator, Plan B and Rohmeo De popularized it.
Is the Bitcoin rainbow chart accurate?
The Bitcoin rainbow chart is used with a logarithmic scale and displays averaged mean prices on time frames equal to or longer than daily. It shows general trends better than precise figures. Moreover, the models currently in use have been adjusted multiple times, and there can be some discrepancies between different sources. None of the variations of the Bitcoin rainbow chart are indicative of the future price, though, as past price performance does not guarantee future results.
Disclaimer
This article is not a piece of financial or investment advice. When dealing with cryptocurrencies, remember that they are extremely volatile and thus, a high-risk investment. Always make sure to stay informed and be aware of those risks. Consider investing in cryptocurrencies only after careful consideration and analysis of your own research and at your own risk.
