What is the Bitcoin rainbow chart?

The Bitcoin rainbow chart is a visualization that combines the historical prices of Bitcoin (BTC) and colored bands that represent its relative over and undervaluation. Crypto traders often analyze market trends and indicators to make informed decisions about the potential value of an asset.

Although some of this calculation involves personal judgment, technical analysis can also be useful to help determine local price tops and bottoms. Specific tools like Bollinger bands and Fibonacci lines are overlaid on the chart of an asset’s price over time, and these can indicate price levels at which traders may consider buying or selling.The Bitcoin rainbow chart is similar to these tools, with a rainbow visualization overlying BTC’s price on a logarithmic scale.

It was introduced in 2014 during one of Bitcoin’s bear markets to show the cyclic, band-limited nature of BTC’s price. In the years since, it has been refined with new data. The rainbow chart’s characteristic rainbow appearance comes from the multi-colored bands that represent significant price levels.

According to the rainbow chart, as BTC’s price rises within the rainbow (and gets closer to red), Bitcoin is believed to be more overvalued. If BTC were to drop within the rainbow (and gets closer to blue and purple), the chart would indicate that BTC is potentially undervalued.

The Bitcoin rainbow chart was first posted by a Reddit user named azop in 2014 with the title “Actual Bitcoin Price vs. Trendline Deviance”. BTC’s price fell sharply after the famous 2013 bull run, and the chart depicted a rainbow that indicated the asset was “very under-valued” — BTC’s current price was in the lower, blue region of the multi-colored band. It was improved upon by a bitcointalk.org user named Trolololo, who replaced the simple, linear band with a logarithmic regression line.

The chart uses a logarithmic scale for Bitcoin’s price on the y-axis, which allows for a more natural presentation of the data by (somewhat) limiting volatility. It has also earned more discrete color bands since inception — it started with five but now has nine — representing different levels of market sentiment.

Its x-axis is simply time, allowing historical data to inform the logarithmic regression model and create the bands. Bitcoin halvings are notated because of their proven impact on cyclical price trends.

Traders can use the Bitcoin rainbow chart and several other technical analysis tools (such as the Relative Strength Index or Moving Average Convergence/Divergence) to help make decisions about when to buy and sell. But it is not quite that simple. Like every other method used to help predict prices, it is not a perfect predictor.

The rainbow chart is based on historical data, and as the saying goes: past performance is not indicative of future results. The rainbow chart maintains a consistent appearance of accuracy relative to historical price trends because it is frequently recalibrated with new information, even if those adjustments significantly alter how previous price points are framed. Additionally, the rainbow chart seems to be best at depicting long-term price trends rather than intra-day, intra-week, or even intra-month movements of BTC. Still, traders may find it helpful to conceptualize Bitcoin’s price over time.

Disclosures:

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