ZoneBitcoin EditorialFinancial markets have always been fraught with complexity, and the cryptocurrency market is no exception. Among the many analysis tools available to investors and traders, the “rainbow chart” has established itself as an interesting visual way to interpret historical Bitcoin price trends.
In this article, we will explore what a Bitcoin rainbow chart is and how it can be used to help us find the right time to invest in bitcoin.
RainBow Bitcoin Chart History?
The concept of the Bitcoin rainbow chart was created in 2014 by anonymous Reddit forum user “azop”. Originally, the chart had no “serious” pretensions and was designed to amuse and entertain Internet users. The idea was to show bitcoin price trends across years. Due to the colors used, this graph was quickly named “Bitcoin Rainbow Chart”.
The same year, a member of the Bitcoin Talk forum called “trololo” took up the principle of the Bitcoin Rainbow Chart by including a logarithmic regression model. This highlighted an initial phase of growth or decline followed by a slowdown over time.
What is a Rainbow Bitcoin chart?
The Bitcoin Rainbow Chart is a basic logarithmic regression chart representing the change in the price of Bitcoin over time. This chart consists of nine colored bands ranging from purple to dark red indicating when it may be appropriate to buy, sell or hold your Bitcoins.
The upper colors of the Rainbow Chart point to a bull market and signal an opportune time for strategic investors to sell Bitcoin. In contrast, lower colors suggest that overall market sentiment is bearish, making it a great time to acquire more Bitcoin
How to interpret the Rainbow chart?
Although the Bitcoin rainbow chart is not a flawless favorite chart in itself, some people note that it has been relatively accurate throughout BTC's history.
Here is what the colors in the chart mean:
- Purple: A continued bearish phase of BTC.
- Blue: BUY! An area suitable for purchasing bitcoin at a good price.
- Green: An ideal area for accumulating bitcoin ( make DCA and savings in bitcoin).
- Light green: A BTC accumulation zone at a “low” price.
- Yellow: Hold! A favorable period for holding BTC.
- Light orange: Is this the start of a bull run?
- Dark orange: Intense FOMO. Speculative interest and investments are increasing.
- Red: Sell! Optimal time to sell BTC.
- Dark red: Maximum Bubble Territory. Phase of a bubble its maximum.
As we write this article, we are in a blue/purple period which tells us that it is a good time to invest.
What are the limitations of the Rainbow Chart?
The Bitcoin rainbow chart relies on data and regression lines that are primarily plotted on long time scales. They therefore do not need to be adjusted frequently and are not suitable for short-term forecasting.
The lines of a logarithmic regression chart are plotted against the market's lowest and highest prices. However, if the price moves in the middle of these limits then the reliability and precision of the chart is less.
However, the Rainbow chart allows you to visualize the history of Bitcoin price variations in a simple way. We can for example note that at each halving, the price tends to increase compared to the dark red zone.
Final word
The Bitcoin rainbow chart is an interesting visual analysis tool that allows investors and traders to understand historical Bitcoin price trends.
By interpreting chart colors, you can identify trends, spot support and resistance levels, assess volatility, and make more informed investment decisions.
However, it is important to remember that cryptocurrency market analysis involves many factors, and the rainbow chart should be used in conjunction with other analyzes to make informed decisions. Using this chart alone is not sufficient in a complete technical analysis.
Finally, although the color bands follow a logarithmic regression, they are otherwise essentially arbitrary and have no solid scientific basis.
Basically, use the rainbow chart very carefully.
