Bitcoin rainbow chart is fast becoming a go-to indicator for predicting asset performance in the long term. Unlike other chart indicators that may require technical skills to interpret, the BRC is easy to understand. 

In this descriptive guide, we will discuss the following;

• What is the Bitcoin Rainbow Chart?
• History of Bitcoin Rainbow Chart
• How to Interpret Rainbow Chart
• How Accurate is the Bitcoin Rainbow Chart?
• Limitations of the Bitcoin Rainbow Chart
• Other Rainbow Charts

What is the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a long-term analysis tool that analyzes asset prices by showing price movements. It has different colors and uses a logarithmic growth curve to predict the possible direction of future price for BTC.

With the different colors, the chart indicates when it is okay to buy or sell. The colder colors indicate a good time to buy, while the hotter colors show the best time to sell to help maximize profit.

This metric analyzes prices and marks dates to essential Bitcoin events, like the halving dates. How did this critical tool come about? 

History of Bitcoin Rainbow Chart

The Rainbow chart underwent modifications by different individuals before taking its final and current shape. A bitcoin investor, Azop, on Reddit, laid the first blocks of this vital tool in 2014 as a fun way of looking at the coin’s long-term. The rainbow chart got its name from its colorful nature.

Afterward, another trader, Trolololo, improved it, making the tool famous in the Bitcoin talk forum during the 2014 bear market. He produced version 2.0 of the chart by adding the logarithmic regression. Logarithmic regression is a statistical model in which cryptocurrencies like Bitcoin rapidly increase or decrease initially before slowing down over time. 

Several individuals have publicized the Bitcoin rainbow chart or improved its quality. Currently, Blockchain Center’s owner manages it. Rohm modified it slightly by changing it from its former exponential appearance to a bowed version. Up to this point, the rainbow chart is one of the most popular price indicators in the cryptocurrency community, and traders and investors use it.

How to Interpret Bitcoin Rainbow Chart

Effectively using the rainbow chart depends on one’s understanding of the colors. The nine different colors of the bands show whether Bitcoin is currently undervalued or overvalued.

We will explore what each hue symbolizes in the order of unsafe colors (bad time to buy) to safe colors (best time to buy):

• Red Band (Maximum Bubble Territory): The red indicates that the Bitcoin market is extremely overbought and likely to drop, making it the best time to exit the market and make profits. At this point, traders should know that the market may see a crucial correction or crash, which may later cause considerable losses. It is very unsafe to buy during this period.

• Light Red Band (Sell): This is another indication to sell, as it signals that Bitcoin is in a bubble and may burst at any time. Investors who are not looking to HODL long-term should sell at this point to make profits.

• Orange Band (FOMO phase): During this phase, BTC price rises unsustainable, causing buyers to dominate the market because of the Fear Of Missing Out. 

• Light Orange Band (Is This a Bubble?): At this stage, the market is gradually coming to balance

•  Yellow Band (HODL): The yellow band is like the neutral stage of the chart because, at this point, the market is neither bearish nor bullish. During this time, investors must hold onto their Bitcoin.

• Lime Band (Still Cheap): At this phase, Bitcoin has reached its full potential and will be relatively cheap for hodlers and long-term investors to buy.

• Green Band (Accumulate): This is the safest period to accumulate coins as the market is stable.

• Light Blue Band (Buy): The light blue stage is another opportunity for investors to buy more coins as the Bitcoin price is undervalued. At this point, traders can get it at discounted prices.

• Blue Band (A Fire Sale): Bitcoin is highly undervalued within this region, and investors can add more coins to their portfolios.

How Accurate is the Bitcoin Rainbow Chart?

Like every other price indicator, the Bitcoin Rainbow Chart cannot guarantee 100% accuracy. It follows historical data and uses statistical tools, so it cannot predict future market conditions, regulatory changes, or current trends perfectly.

Although the chart has shown correct predictions, it is just one of the many tools a trader needs in his toolbox to maneuver the market. Before deciding to either buy or sell, an investor needs to research different sources, consider market trends, read news articles, etc.

Limitations of the Bitcoin Rainbow Chart

The rainbow chart has a record of giving correct predictions relatively most of the time; it is also easy to use as far as one understands what the color bands represent. However, there are limitations to how far investors can use the Chart. For instance:

1. With the highly volatile nature of the Bitcoin market, no price indicator can perfectly predict the market. Therefore, the Bitcoin Rainbow Chart cannot work as a single price indicator.
2. Since the Chart is based on historical price trends, it does not reflect market conditions, regulatory changes, or unpredictable events that could affect Bitcoin’s price.
3. The price analysis found on the BTC Rainbow Chart might not work for cryptocurrencies other than BTC.
4. A trader relying solely on the Rainbow Chart for investment advice will most likely suffer significant losses. The price indicator is just one of the many tools an investor needs in his toolbox. Before deciding whether to sell or buy, a sage trader will thoroughly research, consider market conditions, pay attention to news articles, and listen to expert advice.

Other Rainbow Charts

Another type of Rainbow Chart similar to BTC’s is the Ethereum Rainbow Chart. The Ethereum Rainbow Chart also uses a 9-color-coded system to indicate different Ethereum price levels. The Chart helps ETH traders know when to buy, hold, or sell the coin. 

Conclusion

The BTC Rainbow Chart is a historical technical analysis tool for predicting  Bitcoin prices by showing price movements. It has nine color bands and uses a logarithmic growth curve to advise investors when to buy, hold, or sell BTC.

Although the Rainbow Chart is relatively correct and easy to use, it is not a perfect predictor of BTC prices, therefore investors should use it alongside other price indicators while making thorough research, considering market conditions and taking advice from expert traders.

The information in this article should not be considered financial advice. Each investor is solely responsible for making financial decisions.