In this article, I want to discuss the popular tool – the Bitcoin Rainbow Chart- used to represent Bitcoin’s long-term price trends.
A colored graph gives a new way of looking at the market cycles of Bitcoin and helps investors see where it may be within its more excellent path.
In this article, we will look at the workings of the chart and how important it is when analyzing Bitcoin performance.
What is the Bitcoin Rainbow Chart?
The Bitcoin Rainbow Chart is a technical analysis tool illustrating the history of Bitcoin’s price progression.
It uses a logarithmic scale to plot Bitcoin’s long-term price movement, creating a multi-colored chart.
Every color band represents various price ranges and assists in predicting future prices.
Investors use it to determine whether Bitcoin is undervalued or overvalued based on its past performance.
How Does The Bitcoin Rainbow Chart Work?
All these levels indicate different prices that help determine whether Bitcoin is overpriced, underpriced, or rightly priced.
The chart utilizes years of historical data to apply a logarithmic regression curve. Then, it is segmented into bands of different colors, ranging from blue, which indicates the lowest value, to dark red, which is the highest.
- Dark red: This means the market has been highly overbought and suggests a correction in price may come.
- Red: This means that Bitcoin is overbought, and traders should consider taking profits.
- Dark orange: This color shows that the market was driven by FOMO (fear of missing out) buying.
- Light orange: A light orange band could indicate neither strong buy nor sell signals were given in the market.
- Yellow: Suggests fair valuation where one should hold their investments in Bitcoins.
- Light green: Bitcoin is cheap and might be worth purchasing
- Green: Suggests it would be wise to buy more bitcoins at this time
- Light blue: It’s a strong buy signal
- Blue: Bitcoin is undervalued, indicating a potential floor for this market.
Who made the Bitcoin Rainbow Chart?
“Trolololo,” a user on the Bitcoin Talk forum, first made the Bitcoin Rainbow Chart in 2014. Since then, this concept has been improved by different participants in the Bitcoin community, leading to its latest version;
The Rainbow Chart. This was initially designed as a fun tool, but now it is one of the most popular ways of visualizing long-term price trends for Bitcoins.
The latest versions of Bitcoin Rainbow Charts can be found on platforms such as TradingView and Blockchain Center.
Is the Bitcoin Rainbow Chart accurate?
A significant portion of its value is that it can be used as a Rainbow chart to assess price trends, but it also has some weaknesses.
It gives hints based on historical data and some assumptions but should not be relied upon as the only source one uses to make investment decisions.
Many things influence the market. Hence, color bands do not always indicate current market situations or future price moves.
However, this chart can be a good starting point for those interested in understanding Bitcoin’s place in the overall market cycle.
It works best when combined with other indicators and methods of analysis.
How to use the Bitcoin Rainbow Chart in your strategy
The Bitcoin Rainbow Chart has been incorporated into the investment strategy, and this is how you can use it:
Long-Term Trends
It is best to use the rainbow chart for long-term analysis. For example, watch the color bands over many months or years to see if there are any trends. If Bitcoin falls in the green or blue area, it could be undervalued, meaning it might be a good time to buy. Conversely, red or orange zones suggest caution or overvaluation.
Entry and Exit Points
When planning to buy or sell Bitcoin, check those colors out on the chart. In green or blue periods, when people are happy with their investment, you should try to buy.
On the other hand, whenever you see a chart with more red and orange colors, consider selling your position because that shows that danger is real.
Risk Management
The rainbow chart can also help control risks. Be careful if Bitcoins fall into purple (extreme optimism). It might indicate a speculative bubble. Change your distribution of assets in response.
Diversification
Do not rely only on the rainbow chart; combine it with other technical and fundamental analysis types, and diversify your portfolios across different assets for risk mitigation.
Stay Informed
Know what is happening around the news, like regulatory changes and market developments, since Bitcoin’s price exceeds what appears in the rainbow chart.
Conclusion
The Bitcoin Rainbow Chart helps people see its development excitingly using colored market periods.
It is also helpful in determining the past price trends and possible market cycles;
however, it relies on historical data and assumptions and should not be used to make investment decisions.
Combined with other analytic techniques and indicators, it could prove helpful to investors seeking to ascertain whether Bitcoin has any potential worth within a more significant market setting.
