Bitcoin Rainbow Chart (Rainbow Chart): Long-Term Price Trend Analysis Tool

The Bitcoin Rainbow Chart is a unique technical analysis tool that helps you better understand long-term market cycles. It uses a system of colored bands to display different phases of price momentum, from periods when the asset is undervalued to times when it is overvalued. This is a useful tool that both beginners and experienced traders can leverage to gain a clearer view of Bitcoin’s long-term trend.

What Is the Bitcoin Rainbow Chart? Understanding How It Works

The Bitcoin Rainbow Chart is built on a logarithmic scale. It doesn’t simply display price on a linear scale but instead uses a logarithmic regression method to smooth out sharp price fluctuations. This approach allows you to see the true trend rather than being distracted by short-term volatility.

The rainbow chart uses nine different color bands, each representing a specific valuation level:

• Dark Blue (“Golden Opportunity”): Indicates Bitcoin is significantly undervalued
• Light Blue (“BUY!”): Signifies an extremely undervalued state
• Green (“Accumulation”): Suggests the asset is undervalued
• Light Green (“Still Cheap”): Shows Bitcoin is slightly undervalued
• Yellow (“HODL!”): Represents fair valuation
• Orange (“Is This a Bubble?”): Warns of potential overvaluation
• Light Red (“FOMO Rising”): Indicates possible overvaluation
• Red (“Sell. Seriously, SELL!”): Signifies very high valuation
• Dark Red (“Maximum Bubble Zone”): Alerts of extremely overvalued conditions

The strength of the rainbow chart lies in its ability to provide an intuitive visual perspective on market sentiment. Instead of just looking at numbers, you can quickly identify which phase of the cycle Bitcoin is in based on the color.

Development History: From 2014 to the Modern V2 Version

The rainbow chart isn’t a new tool. It has an interesting development history. In 2014, a Reddit user known as “azop” came up with the initial idea. The concept stemmed from the need to understand Bitcoin’s long-term trends more visually.

The first version was quite simple—just colored bands plotted on a logarithmic scale. However, by 2019, another analyst named Rohmeo recognized its potential and decided to improve it. The updated version, called Bitcoin Rainbow Chart V2, introduced the distinctive “rainbow” shape we see today. Rohmeo also refined the mathematical formulas behind the color system.

Today, websites like BlockchainCenter, TradingView, and many other analysis platforms offer versions of the rainbow chart. Its widespread popularity demonstrates its practical value within the trading community.

How to Use the Rainbow Chart Effectively

Using the rainbow chart isn’t complicated, especially once you understand the basic steps. Here’s a practical guide:

Step 1 – Identify the Current Price Position: Open the rainbow chart on your preferred platform. Zoom in if needed. Hover your cursor over the current price line to see which color band it falls into. This gives you an initial understanding of the current valuation.

Step 2 – Interpret the Colors: Cool colors like blue and green typically suggest Bitcoin is undervalued—good moments to consider buying. Warm colors like orange and red warn that the asset might be overvalued—times to be cautious or consider taking profits.

Step 3 – Compare with Historical Data: The rainbow chart is based on historical data. Look for past periods when Bitcoin was in the same color band. Observe how the price moved afterward. This helps identify patterns and potential future movements.

Step 4 – Combine with Other Tools: The rainbow chart works best when used alongside other technical indicators. Watch trading volume, RSI (Relative Strength Index) to gauge buying/selling pressure, or MACD to confirm momentum. You can also combine it with the Bitcoin Stock-to-Flow (S2F) model for a broader long-term valuation perspective. This multi-faceted approach creates a more robust analysis strategy.

Interpreting Rainbow Bands to Forecast BTC Trends

Understanding what each color band signifies is key to using the rainbow chart effectively. Here’s how these zones reflect market psychology:

Blue to Green Zone (Accumulation Phase): When Bitcoin is in these bands, it indicates undervaluation relative to historical trends. Smart investors often start accumulating long-term positions during these times. If you believe in Bitcoin’s long-term potential, this could be a good entry point.

Yellow Zone (Fair Valuation): When Bitcoin’s price is in the yellow band, it suggests the market is fairly valued. Neither excessive fear nor greed dominates. It’s a “safe” zone to hold your current positions.

Orange to Red Zones (Overvaluation Phase): These bands serve as warnings. Orange indicates a bubble forming. Light red shows FOMO (Fear of Missing Out) is rising. Red and dark red are the highest warning zones. While not necessarily predicting an immediate crash, history shows Bitcoin tends to spend less time in these zones.

Each color band acts as a signal, guiding when to buy, hold, or be cautious. Remember, the rainbow chart is a reference tool—not a crystal ball predicting exact future prices.

Advantages of the Rainbow Chart for Traders

The rainbow chart offers several unique benefits:

Visually Intuitive: The color bands allow quick recognition of market phases at a glance. No need for complex calculations or interpreting obscure indicators—everything is visually straightforward.

Long-Term Perspective: Unlike tools focused on short-term volatility, the rainbow chart provides a broad view of Bitcoin’s development over years and its market cycles.

Easy to Learn and Use: Beginners appreciate its simple design. You don’t need advanced math skills or extensive trading experience to start understanding its signals. Within minutes, you grasp the basic implications.

Supports Better Decision-Making: When combined with other technical tools, it enhances your ability to assess market conditions and make smarter trading decisions.

Educational Value: The rainbow chart is also a great learning resource. It helps you understand market cycles, investor psychology, and why Bitcoin behaves differently at various stages.

Reliability of the Rainbow Chart: What You Should Know

Many traders ask: Is the rainbow chart reliable? The answer isn’t straightforward.

Historical Data Basis: The chart is built on past price movements. It aligns well with historical trends but cannot predict future events with certainty. Markets evolve, conditions change, and unexpected shocks can occur.

Logarithmic Regression Limitations: This method smooths out volatility to reveal the main trend. While helpful, it may overlook black swan events or sudden regulatory shifts that don’t follow the expected curve.

Subjectivity in Band Thresholds: The boundaries between color bands aren’t fixed. Different analysts might set thresholds differently based on their interpretation of “overvalued” or “undervalued,” leading to varying signals.

In summary, the rainbow chart is a helpful guide for understanding general market sentiment and long-term cycles but should be used alongside other analysis methods. It’s not a guaranteed predictor.

The Relationship Between Bitcoin Halving and the Rainbow Chart

Bitcoin halving occurs roughly every four years, reducing the block reward miners receive by half, which decreases new Bitcoin issuance and increases scarcity.

The rainbow chart often reflects these events interestingly. Before halving, Bitcoin tends to be in the blue (undervalued) bands, suggesting the market hasn’t fully priced in the upcoming scarcity. After halving, as demand increases and supply tightens, the price often moves into higher bands—yellow, orange, or red—indicating rising valuation and market optimism.

This transition from undervalued to overvalued bands around halving events illustrates how market psychology shifts with perceived scarcity. However, halving alone doesn’t guarantee specific price outcomes; it provides context that can support your analysis.

Limitations and Cautions When Using the Rainbow Chart

While useful, the rainbow chart has limitations:

Retrospective Nature: It’s based on historical data and cannot predict future with certainty. Structural market changes can render past patterns less relevant.

Simplistic Model: The color bands are a simplified representation. They don’t account for all factors influencing price, such as regulations, macroeconomic shifts, or technological developments.

Subjectivity in Thresholds: Different analysts may interpret the boundaries differently, leading to varying signals.

Not for Short-Term Trading: Designed for long-term trend analysis, it smooths out short-term fluctuations. It’s not suitable for day trading or timing short-term entries/exits.

Market Evolution: As Bitcoin matures, its cycles may change, requiring adjustments to the model to stay relevant.

Use the rainbow chart as part of a broader toolkit—combine it with other indicators, fundamental analysis, and market news for a comprehensive view.

The Connection Between Bitcoin Halving and the Rainbow Chart

Bitcoin halving events, occurring approximately every four years, reduce the block reward miners receive, decreasing new supply. This scarcity effect often influences market sentiment and valuation.

The rainbow chart tends to reflect these changes. Prior to halving, Bitcoin often appears in undervalued (blue) bands, indicating the market hasn’t fully priced in the upcoming scarcity. Post-halving, as scarcity impacts supply and demand, the price tends to rise into higher bands—yellow, orange, or red—signaling increased valuation and optimism.

This pattern helps contextualize market cycles, but remember: halving is a factor among many influencing price, not a guaranteed trigger.

Final Thoughts

The Bitcoin Rainbow Chart is an engaging and insightful tool that visualizes long-term market cycles through color-coded bands. It helps traders and investors quickly gauge whether Bitcoin is undervalued, fairly valued, or overvalued, based on historical trends.

Originating in 2014 and upgraded to version 2 in 2019, it’s now widely available on leading analysis platforms. Its main strengths are its visual clarity, long-term perspective, and educational value.

However, it’s important to recognize its limitations: it relies on historical data, simplifies complex market dynamics, and isn’t suited for short-term trading. Always use it as part of a diversified analysis approach, combining technical indicators, fundamental insights, and market news.

By understanding how to interpret the rainbow bands and integrating this with other tools, you can make more informed decisions and better navigate Bitcoin’s cyclical market behavior.