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What is the Bitcoin Rainbow Chart?

July 09, 2022 - 7 min read

The purpose of the rainbow chart was to provide a pleasant and intriguing visual for other Bitcoin investors to appreciate, and the chart was dubbed the “Bitcoin Rainbow Chart” because it was vivid and precise.

Buying and selling cryptocurrencies at the right time is never easy, and it necessitates an extensive study of recent trends and the current state of your chosen currency. When making future investment decisions, it’s beneficial to keep an eye on pricing trends from the past. 

Über Holger, CEO of Holger, employed a logarithmic regression technique introduced by the Bitcointalk user “trolololo” in 2014. This method produced the colored bands. In addition, a Bitcoin Rainbow Chart was made to show the price change of the cryptocurrency. Many Bitcoin investors have relied on this chart to determine when the market will enter a bear or bull zone.

Introduction to the Rainbow Chart

The Rainbow Chart is a tool for long-term Bitcoin value. It utilizes a logarithmic growth curve to predict the possible future direction of Bitcoin’s price. The Bitcoin Rainbow Chart is a simple logarithmic regression chart depicting the evolution of the Bitcoin price over time. In addition, this crypto rainbow chart utilizes colored bands to suggest when it may be appropriate to purchase, sell, or retain cryptocurrencies.

It superimposes rainbow color bands on top of the channel of the logarithmic growth curve to show market emotion at each rainbow color stage as the price progresses through the stages. Therefore, it emphasizes prospective buying and selling opportunities.

Until now, the price of Bitcoin has generally remained inside the rainbow-colored bands of the logarithmic growth channel. Although the Bitcoin Rainbow Chart is not intended to be predictive, it has remained relatively accurate since its inception. The rainbow comprises nine distinct bands of color, with blue at the bottom and red at the top. When the price of Bitcoin falls, the line begins to move toward the blue color band. Likewise, a price increase shifts the product towards the red color band. 

Merits and Demerits of Bitcoin Rainbow Chart

Everything has its merits and demerits, and the Bitcoin Rainbow Chart is no exception. So, let’s dig a little deeper.

The Merits of the Bitcoin Rainbow Chart are as follows:

  • During its eight-plus years, the chart has been consistently accurate. 
  • The logarithmic regression model is (typically) reasonably useful for many different types of investments in assets that are relatively volatile.
  • With this chart’s help, investors can decide whether they should buy or sell in a relatively simple yet informed manner.

The Demerits of the Bitcoin Rainbow Chart are as follows:

  • The chart lacks any form of scientific foundation and merely displays price fluctuations that occur over a long period.
  • Even if the Bitcoin Rainbow Chart has, for the most part, been accurate throughout the history of Bitcoin, there is always a possibility that it will be inaccurate in the future without any prior warning.
  • A number of traders make the mistake of putting an excessive amount of faith in this chart.

Logarithmic Regression

Logarithmic regression is a graph used to assess a statistic outside a linear line. Using logarithmic regression for statistical analysis is one of the nonlinear regression analysis techniques. This graph style is distinguished by an initial quick increase or decrease in pace, followed by a steady deceleration over time.

Nine separate bands of various colors make up the Bitcoin Rainbow Chart. A rainbow is made by combining these bands. So, let’s see how it works:

In this particular crypto rainbow chart, the nine bands are designated as:

  1. Blue: Fire sale
  2. Bluish-green: Buy
  3. Green: Accumulate
  4. Pale green: Still Affordable
  5. Yellow: Need to hold
  6. Light orange: Is this a bubble?
  7. Orange: FOMO (Fear of missing out) intensifies
  8. Red: Sell now
  9. Dark red: Maximum bubble territory

The blue and green color zones indicate the optimal times to purchase Bitcoin. When the price is in these zones, investors who wish to accumulate will do so. Investors should prepare to sell when the price reaches the yellow, orange, and red zones. However, Holger acknowledges that these bands are purely arbitrary and devoid of a scientific basis. Thus they may not be accurate forever.

However, the chart enables you to examine price movements over the long term, ignoring the unavoidable fluctuations caused by daily volatility.

Interpreting the Rainbow Chart

Due to Bitcoin’s relative youth as an asset class, its price fluctuations are highly volatile. Although Bitcoin is being adopted on a macro scale, as evidenced by its general upward price movement, it is subject to market cycles. During these market cycles, the price of Bitcoin may climb and decrease exponentially. It also has very significant daily volatility, which investors must be cautious of.

The Bitcoin rainbow chart illustrates where the Bitcoin price sits within these cycles and provides an investor’s perspective. As previously stated, this chart and accompanying legend labels are for entertainment only and do not constitute investment advice. The rainbow’s upper colors indicate when the market is likely overheated. Historically, such times have proven favorable for strategic investors to begin taking profits.

When Bitcoin’s price falls toward the more fabulous colors, market sentiment is typically depressed, and many investors lose interest in the cryptocurrency. However, the Rainbow chart illustrates that these periods are often optimal for the strategic investor to acquire further Bitcoin.

This Rainbow chart is updated with the most recently daily close price every 24 hours and will always be accessible for free on this page.

Enter and Exit Trades with Bitcoin Rainbow Chart

A logarithmic regression model has been introduced to the rainbow chart of the Bitcoin cryptocurrency, which traders may use to understand better and interpret price fluctuations. In addition, traders can use this chart’s natural logarithmic curve to assist them in choosing when to enter and exit positions.

The date is shown in the horizontal view of this crypto rainbow chart, while the Bitcoin price is shown in the vertical view. This is because although the logarithmic regression model was implemented in the Bitcoin logarithmic chart in 2014, it has been correct up to this time.

For the logarithmic regression to work properly, you must know how the price has fluctuated over time. The value of cryptocurrencies like Bitcoin can rise and fall dramatically in a short amount of time.

The logarithmic regression model showed a significant rise in the beginning before flattening the curve.

Bitcoin Halving

The halving is the most significant event on the Bitcoin blockchain. It causes inflation in the price of cryptocurrency by lowering the production of Bitcoins. Therefore, Bitcoin halving has repercussions for all Bitcoin ecosystem stakeholders.

Approximately every four years, or every 210,000 blocks produced, the block reward provided to Bitcoin miners for processing transactions is halved. This occurrence is known as halving because it halves the rate at which new bitcoins are introduced to circulation. This is how Bitcoin enforces artificial price inflation until all bitcoins are distributed. The halving event is significant because it signifies a further decline in the rate at which new Bitcoins are produced when the overall maximum supply of bitcoins approaches 21 million. The next BTC halving is anticipated to occur on May 5, 2024.

Final Thoughts

In general, the Bitcoin rainbow chart or any other display of logarithmic regression is only beneficial up to a certain point, regardless of the method used to create the collection. However, you will invariably become a more knowledgeable investor if you take the time to familiarize yourself with long-term trading indicators and price trends related to Bitcoin and other cryptocurrencies.

However, there is no guarantee that changes in prices in the past will correlate with changes in performance in the future. Therefore, if you choose to use the Bitcoin crypto rainbow chart, it’s important to remember that it should not be considered the only tool you use when making financial decisions. The strange thing is that, according to this chart, the price of Bitcoin would currently be in the “discounts” band, which is quite close to where it was shortly before the two last halves of the number of Bitcoins in circulation.

To level up and gain a deeper knowledge of all things related to the future of the cryptocurrency industry, check out the latest content in the Supra Academy section.

Disclaimer: This article should not be used as the foundation for making investment decisions, as a suggestion to enter into any transaction, or as a suggestion to partake in any investment strategy. 

References

  1. (2022, 23 Jun.). Bitcoin Price Prediction: Growth Predictions For The Future. Altrady.
  2. Batista, I. (2020, 14 Apr.). Do you know about the Bitcoin’s rainbow? Medium
  3. Bybit Learn. (2022, 19 May). Bitcoin rainbow chart: Logarithmic regression and Bitcoin price movements. Bybit.
  4. Cavicchioli, M. (2020, 17 Apr.). What is the Bitcoin rainbow chart?. The Cryptonomist
  5. Gupta, R. (2021, 29 Jun.). How to read a Bitcoin rainbow chart and maximize your profits. Market Realist
  6. Bitcoin rainbow price chart indicator. LookIntoBitcoin
  7. (2022, 28 Jun.). Introduction to Bitcoin Rainbow Chart: How Can It Be Used to Estimate Bitcoin Price. Zipmex.

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