Bitcoin Rainbow Chart: What Is It? How To Read It?

What is the Bitcoin Rainbow Chart?

The Bitcoin rainbow chart is one of the renowned technical analysis tools that gives a quick view of Bitcoin’s price trends in the market. It uses a range of colors to represent the price range of Bitcoin, which is the reason why it is called the “Bitcoin rainbow chart”. With the help of this chart, we cannot only know where the Bitcoin price is going but also decide which investment decision to make based on the price trend.

Origin of Bitcoin Rainbow Chart

The origin of the Bitcoin rainbow chart has an intriguing story behind it. A Reddit user named “Azop” created the first version of this chart in the early days of Bitcoin to represent its historical price movements.

The next version of this chart was developed by another trader named “Trolololo” and made it widely popular in the Bitcoin talk forum during the 2014 bear market. He combined the rainbow chart with the logarithmic regression and created an advanced version of the rainbow chart. During the times of extreme volatility, the Bitcoin rainbow chart brought a ray of hope for investors, implying that Bitcoin’s price could increase in the near future.

How To Read the Bitcoin Rainbow Chart?

The “Bitcoin rainbow chart” is a log chart and as its name implies, it is formed by nine colors. Each color represents a different price range of Bitcoin. Let us now understand how to read the Bitcoin rainbow chart based on the colors.

• Dark Red – When the Bitcoin price is overvalued and going on an upward trend, it will be in the dark red price band. In this case, the price is likely to drop sooner.
• Red – This is the price range below the dark red price range. It indicates that Bitcoin is overbought and has an inflated price, which makes it a good time to exist and make profits.
• Dark Orange – The dark orange price band implies that buyers are dominating the market. As the Bitcoin price rises, fear of missing out (FOMO) builds up and investors flock to buy BTC.
• Light Orange – The light orange price band implies that the market is balanced.
• Yellow – The yellow price band implies the Bitcoin price is falling and there is a possibility of further drop. Investors must hold into their Bitcoin and existing at this range can be a bad idea.
• Light Green – In this price band, the Bitcoin trades at a further low price. For long-term investors and hodlers, this is a good time to buy Bitcoin.
• Green – This price range of Bitcoin is also a favorable time to enter a market position and buy Bitcoins.
• Light Blue – The light blue Bitcoin price band implies that Bitcoin’s price is undervalued and is a very good time to buy BTC at a discounted price.
• Blue – At this range, the price of Bitcoin is severely undervalued.

What Does The Bitcoin Rainbow Chart Imply?

Since you got an idea of what a Bitcoin rainbow chart looks like and how to read it, let us now understand how you can use that information to make investment decisions. The chart not only helps you understand the Bitcoin market dynamics but also helps you identify buying and selling opportunities.

In a quick glance, the rainbow chart helps you identify the currency price range of Bitcoin. And, you will know whether its price is too high or too low based on the average price of Bitcoin. In case the Bitcoin is in the lower band, i.e., in green, light blue, or blue bands, you can conclude that is a good time to buy Bitcoin at low price. On the other hand, in case the Bitcoin price is in upper bands, i.e., dark red, red, or orange you can look at it as a selling opportunity since the price is high.

Additionally, you can also estimate the overall price trend of Bitcoin through the rainbow chart. If the price trend is moving up, you can expect a bullish trend. Or, if it is moving down, you can expect a bearish trend. All things considered, investors should not solely depend on the Bitcoin rainbow chart for making investment decisions.

Limitations of the Bitcoin Rainbow Chart

Even though the Bitcoin Rainbow chart gives an idea regarding the future price trend of Bitcoin to some extent, it has its limitations. Let us break down some of the limitations of it in this section.

• The Bitcoin rainbow chart considers the previous price chart patterns of Bitcoin. It gives a future estimation based on that. However, there can be numerous other factors in the industry that could affect Bitcoin’s market price.
• As the name suggests, the Bitcoin rainbow chart can only be applied to Bitcoin but not for other cryptocurrencies.
• The Bitcoin rainbow chart was created to instill hope in investors in the dark times of the market. It cannot be taken seriously as investment advice.
• There is a possibility that the parameters used in creating the Bitcoin rainbow chart are subjected to manipulation.