Bitcoin Rainbow Chart and How to Read It

The price of Bitcoin continues to show a positive trend even though it had a free fall at the beginning of June and July 2022. Recorded on Saturday, August 13, 2022, the Coin Market Cap showed an increase of 3.56%, or equivalent to the price of IDR 363 million / coin. However, due to its highly volatile nature, on August 18, 2022, Bitcoin weakened again by 2.62%, or the equivalent of IDR 344 million / coin. With the latest data, an investor or trader must be able to make an in-depth analysis in order to accurately predict the Bitcoin market price and avoid large losses.

To be able to analyze Bitcoin market movements, there are several methods of analysis that you can use. For qualitative analysis, you can predict the ups and downs of Bitcoin through the latest news and see if there are news factors that can affect Bitcoin market movements. Then for quantitative analysis, you can read candlestick patterns and also the Bitcoin Rainbow Chart. You can learn how to read candlestick patterns here. For this article, let’s talk more about the Bitcoin Rainbow Chart!

What is the Bitcoin Rainbow Chart?

The Rainbow Chart is one of the longest-used tools in evaluating Bitcoin price movements. It was first introduced by a Reddit user named Azop in 2014, who created it to evaluate the market price of Bitcoin to the crypto community on the site. After being recognized by more people, this idea was developed using Logarithmic Regression and then published on by Uber Holger.Ā 

Logarithmic Regression itself is a graph used to make statistical analysis with an approach that reads the relationship of a factor with price movements. An important feature of this type of chart is that the price rate will fluctuate up and down at the beginning, but the movement will slow over time.

The Bitcoin Rainbow Chart is depicted as a rainbow, with each color representing a different meaning. This tool does not consider the ups and downs of Bitcoin value in the short term, making it more suitable for long-term analysis.

Color Meanings on the Rainbow Chart

Here are the meanings of the colors in the Bitcoin Rainbow Chart:

  • Dark red – the price bubble is about to burst
  • Red – investors are advised to sell their assets now
  • Dark Orange – many investors are experiencing FOMO (Fear of Missing Out)
  • Orange – it is predicted that there will be a price bubble when this color comes out
  • Yellow – Hold on to the asset. HODL (stands for “Hold on for dear life!”)
  • Light green – market prices are starting to decline
  • Green – Investors are advised to buy the asset now
  • Bluish Green – Buy now!
  • Indigo – Massive discount on the asset price

How to Read the Rainbow Chart

Reading the Rainbow Chart is basically very easy because each color already has its own meaning. For example, if the market price is in the blue and green zones, it means it is oversold, while in the orange and red zones, it means it is overbought. From there, you can deduce that you need to buy assets in the blue and green zones, while in the other zones, you should get ready to sell your assets.

Is the Rainbow Chart Accurate?

As the person who developed the rainbow chart, Hogler states that it was created without any scientific basis. It was developed to allow readers to observe market price movements over a long time without the distraction of daily price fluctuations. In addition, from this chart, investors can also see the right time to buy or sell Bitcoin. However, the chart is not investment advice.

Although not considered very accurate, the Bitcoin rainbow chart has managed to reveal interesting information about market movements. From this chart, it can be seen that one year after halving, the price of Bitcoin will usually experience a drastic increase. One example is in 2013, when Bitcoin reached its highest point since its launch at $1000. Then the same thing happened in 2017 and 2021.

From the explanation above, we can conclude that the rainbow chart can be used as one of the metrics in analyzing market prices. However, it would be better if you combined other analyses such as candlestick analysis, data-on-chain, or even the stock-to-flow model. This way, you can predict market prices more accurately.Ā 

How about it? Getting more interested in investing in Bitcoin? If you want to test your analytical skills before trying it out, Tokenomy lets you practice with a demo account before trading for real. Once you are convinced, you can visit the TokenomyX page and start trading Bitcoin right away!Ā 

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