The Bitcoin rainbow chart is a visualization that combines the historical prices of BTC and colored bands that represent its relative over- and undervaluation.
Cryptocurrency investors are always looking for ways to know when the price of an asset is “overpriced” or “a good deal.” Although some of this calculation involves personal judgment, technical analysis can also be useful to 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 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. As BTC’s price rises within the rainbow (and gets closer to red), Bitcoin is believed to be more overvalued. As it drops within the rainbow (and gets closer to blue and purple), BTC is more likely undervalued.
How does the Bitcoin rainbow chart work?
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 ten—representing everything from “Bitcoin is dead” to “BUY!” to “ ODL!” to “Maximum Bubble Territory”. 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.
Now, the rainbow chart is displayed on Blockchaincenter.net and maintained with up-to-date price data.
How is the Bitcoin rainbow chart used?
Traders 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 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. Also, because it is adjusted based on up-to-date information, the rainbow chart always appears to be accurate to historical price trends even when it might have been adjusted significantly since those prices were current. Finally, 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, investors may find it helpful to conceptualize Bitcoin’s price over time.
Bitcoin rainbow chart essentials
The Bitcoin rainbow chart is a technical analysis used to visualize long-term valuation of BTC over time.
Since its creation in 2014, the rainbow chart has undergone multiple adjustments to more accurately reflect BTC’s price trends.
Though it has limitations because of its reliance on historical data, the rainbow chart is a popular tool for crypto traders to understand Bitcoin’s value relative to its current price in the context of previous cycles.