Rainbow Chart Bitcoin: A Long-Term Price Trend Analysis Tool Every Trader Should Know

Rainbow chart is one of the most popular technical analysis tools within the Bitcoin community. It provides an intuitive way to assess where BTC’s price stands within the long-term market cycle. With its unique color coding from green to red, the rainbow chart helps you quickly identify market sentiment without complex calculations.

What is the Rainbow Chart? How does the Bitcoin price analysis chart work?

The rainbow chart operates based on a logarithmic regression principle, a mathematical method designed to smooth out Bitcoin’s sharp price fluctuations over time. Instead of displaying raw prices, this tool plots a smooth trend line over the long-term price history and surrounds it with color bands. Each band represents a different valuation level.

The color coding system is arranged as follows:

• Dark Green: Bitcoin is undervalued – “Golden Opportunity” zone
• Light Green: Very attractive valuation – “BUY” signal
• Green: Considered cheaper than normal – suitable for accumulation
• Light Green: Slightly cheap compared to historical trend
• Yellow: Fair value, balanced – neutral zone
• Orange: Signs of overbought conditions – caution advised
• Light Red: Increasing FOMO, overvalued – warning alert
• Red: Extremely overvalued – selling phase
• Dark Red: Maximum bubble zone – most dangerous

This method offers a long-term perspective that short-term analysis tools cannot provide.

Development history: From azop’s 2014 idea to the V2 upgrade in 2019

The rainbow chart originated from a simple idea by Reddit user azop in 2014. Initially, it was just a creative way to visualize Bitcoin valuation stages using color bands on a logarithmic scale. The concept quickly gained popularity due to its simplicity and effectiveness.

In 2019, analyst Rohmeo further developed the original idea. He created an upgraded version called Rainbow Chart V2, with improvements in mathematical formulas and the characteristic “rainbow” shape. This new version fine-tuned valuation thresholds and made the chart more accurate. Since then, platforms like BlockchainCenter, TradingView, and CoinGlass have released their own versions of the rainbow chart, making this tool easily accessible.

How to apply the Rainbow Chart in Bitcoin trading strategies

To start using the rainbow chart, you need to understand the basic process. First, visit websites that display this chart. Then, zoom in on recent periods to identify the current position of BTC’s price.

Once you determine the current color band, you can assess valuation. Green bands typically indicate good times to buy or accumulate. Red bands suggest caution or taking profits. The yellow zone shows a balanced market state.

However, the rainbow chart works best when combined with other tools. Use it alongside technical indicators like RSI or MACD to confirm signals. You can also combine it with the Stock-to-Flow model for a more comprehensive long-term outlook. Combining these tools helps you make more informed decisions.

Interpreting price zones: Understanding signals from color bands

Knowing the significance of each color band is key to using the rainbow chart effectively. Blue to green zones are considered accumulation phases, when Bitcoin is undervalued. This is often the best time to buy if you plan to hold long-term.

The yellow zone indicates fair value, where the market is balanced. You can hold your position without much worry. From orange onward, caution increases. Orange and red bands suggest BTC may be trading above its long-term average. This doesn’t necessarily mean prices will drop immediately, but the market is heating up and requires caution.

The dark red zone – the “maximum bubble zone” – is the most dangerous historically. Bitcoin’s price rarely stays here long, and sharp corrections often follow when it exits this zone.

Bitcoin Halving and its correlation with the Rainbow Chart

Bitcoin halving is a significant event occurring roughly every four years. It reduces the mining reward by half, decreasing new Bitcoin issuance and creating scarcity. The relationship between halving and the rainbow chart is interesting from a historical analysis perspective.

Past observations show that Bitcoin tends to be in lower green bands around halving events or just before them. This suggests that the asset is undervalued in the long-term standard. After halving, as supply tightens and demand increases, Bitcoin’s price has historically moved into higher bands across cycles.

This correlation isn’t guaranteed but provides a historical pattern to understand price dynamics. Halving offers important context for interpreting what the rainbow chart indicates. Use this information for long-term planning, but always remember that unexpected events can change the game.

Advantages, limitations, and proper usage

The rainbow chart offers several notable benefits. First, it provides immediate clarity on long-term trends. Beginners can easily understand it without deep mathematical knowledge. It also has high educational value, helping you learn about Bitcoin’s market cycles.

However, it also has limitations. It relies entirely on historical data, so it cannot predict the future with certainty. The chart doesn’t account for external factors like global regulations, black swan events, or technical changes in Bitcoin. The boundaries between color bands are somewhat subjective and may vary depending on implementation.

The rainbow chart is best suited for long-term analysis and strategic planning. If you’re interested in short-term or daily trading, other tools are necessary. The best approach is to use the rainbow chart as part of a broader analysis toolkit, combined with RSI, MACD, volume, and other indicators.

Conclusion: Rainbow Chart as part of a comprehensive analysis toolkit

The Bitcoin rainbow chart is a valuable tool for anyone interested in long-term technical analysis. It offers a clear visual overview of valuation cycles, from undervaluation to overvaluation. Understanding its development history—from azop’s 2014 idea to Rohmeo’s V2 upgrade—helps you gauge its reliability.

However, remember that no analysis tool is perfect. The rainbow chart works best when used alongside other methods and with awareness of its limitations. Stay updated on market conditions, be ready to adjust your strategy, and never rely solely on one tool for decision-making. With the right combination, the rainbow chart can become a valuable part of your Bitcoin analysis journey.