Bitcoin Rainbow Chart: A Concise Overview and User Guide
If you wish to become a professional trader or investor, you have to learn how to use trading tools. This is the only way to be able to predict the price accurately and make educated moves. Otherwise, you are just guessing, which puts you at a greater risk of losing your money. This is true whether you are dealing with traditional markets or cryptocurrencies. Of course, when it comes to the crypto industry, the risk is a lot greater due to stronger volatility.
Expert traders use a variety of tools to learn market behavior, sentiment, probabilities, and more. One of them is the Bitcoin Rainbow Chart, which is very useful for reading market sentiment. It simplifies things by removing the excessive information about the price, which gives you clues about what to do next. This guide will tell you everything you need to learn about it and start using it yourself.
What Is the Bitcoin Rainbow Chart?
The Bitcoin Rainbow Chart is a tool that ignores the short-term price of Bitcoin and monitors its long-term performance. It was developed by a Redditor who concluded that the daily volatility is cluttering the chart. Viewing it as nothing but noise, the Reddit user Azop decided to eliminate it.
Instead, they put in color bands that denote the market sentiment at different price ranges. Depending on which band the price is at, traders know whether they should buy or sell. With that said, the Bitcoin Rainbow Chart is a logarithmic regression chart that represents Bitcoin price evaluation over time.
It is a useful tool for creating your strategy, and it is one of the oldest ones around. However, it is worth noting that it is fairly basic, since daily volatility is not included. This means that you cannot rely solely on the Bitcoin Rainbow Chart to predict the price movement. Instead, it should be one of the tools that you use, but not the only one.
Pros and Cons of the Bitcoin Rainbow Chart
There are advantages and disadvantages to using any tool, and Bitcoin Rainbow Chart is no different.
It offers a number of benefits, such as gaining a general idea about whether to buy or sell. It has remained accurate and relevant for over eight years of its existence. Even today, its signals continue to play a large role in many traders’ strategies. Furthermore, its simplicity makes it easy to understand what information it is conveying. That way, even new traders can understand it instantly, without the need to do much, or any, research.
It is also worth noting that the logarithmic regression model is useful for many different investment types. Especially when it comes to more volatile assets.
As for the negatives, we mentioned already that it only shows long-term price movements. With that being the case, this chart is useless to short-term traders. If you are a day trader, you will not have much use for it.
Another downside is that it doesn’t have a scientific basis. It is more like a pattern that somehow managed to hold true. However, this could change at any time and without warning. Lastly, traders tend to get too confident when using it, and they start relying on it too strongly. This is not recommended for all the reasons mentioned above.
How Does Rainbow Chart Work?
Bitcoin Rainbow Chart is fairly easy to understand and use. In fact, it is considered so user-friendly that anyone can understand it as soon as they see it for the first time.
Using the chart above, you can see when the Bitcoin price enters different color bands. For example, if it enters the red range, this is a signal for selling. The market sentiment is euphoric, and the price is approaching its high point in such a situation. This is an indicator that a correction is likely to start soon, meaning that the price will drop. If it goes beyond red, the BTC price has entered the maximum bubble territory. This is usually taken as a signal for urgent selling.
If, on the other hand, the price enters the indigo section, it signals that the market sentiment is negative. The price has dipped, and this is generally taken as the right time to buy. BTC price doesn’t tolerate being undervalued or overvalued, so its price is likely to shoot up from this position.
If the price is in the middle, such as in the yellow range, that is a good time to stay neutral. Simply hold on to your Bitcoins and continue to play along until you see where the price will go. Just remember that these are the indicators of a potential future and not definitive signs of what will happen.
How To Read the Bitcoin Rainbow Chart?
Since the chart has quite a few colors, let’s break them all down. That way, you will know what is the recommended course of action for each color.
Starting from the bottom, we have Indigo. This color signals that it is the best time to buy Bitcoin. The potential future of the coin is to shoot up, so buying the dip should be the right move. Next, we have blue, which is still a good time to buy BTC. While here, the price is considered undervalued. It could still go further down, but not by much, and after that, it will likely go up anyway.
If the price sits in blue-green, BTC is still cheap to buy. However, keep in mind that this is when the potential for growth starts to show. Once the price enters green, you should not make any rash moves. This is a good time to stick to your coins and HODL. At this point, Bitcoin is fairly valued. As such, it is not recommended to either buy or sell until you get more information.
The price in the light green indicates that Bitcoin’s value is now quite higher than it was at lower levels. There is still potential for growth, so do not be too quick to get rid of your coins. If the price finds itself in yellow, the best that you can do is HODL and wait. However, once it moves to light orange, you should start paying attention. This means that BTC has started building momentum. This is also the time to start researching what is going on, and whether the bubble is inflating.
Things start to get tricky around dark orange, which is usually where FOMO starts to get strong. Bitcoin is already considered overvalued here, and the future price could start going down at any time. This is where those who like to play it safe are likely to make their move. You can either do the same or risk it and see if it goes further.
However, once the price reaches red, this is a signal to sell. Waiting beyond this point is taking a great risk. Bitcoin is clearly in a bubble and heavily overvalued. Buying at this time is strongly discouraged.
Finally, we have dark red, which is the maximum bubble territory. It rarely happens that the price goes beyond this level, although it is not impossible. If you, for some reason, waited until this point, it’s pretty much now or never.
Is the Bitcoin Rainbow Chart Reliable?
As a single tool, Bitcoin Rainbow Chart should not be taken as reliable. It lacks daily volatility data, and that is a massive gap between what is and what it is showing. It is a great thing to note some of the chart highlights and visualize the price action over time. It can even give you an idea of future price movements, if you find the price in red or indigo.
In other words, it is accurate and reliable to an extent. However, it is definitely not reliable enough to use as a single tool for determining your next move. Especially not when it comes to an asset as volatile as Bitcoin.
Ethereum Rainbow Chart
Apart from the Bitcoin Rainbow Chart, there also exists Ethereum Rainbow Chart. This one has slightly different coloration, but the idea is largely the same. The colors go from indigo to blue, sea green, bright green, lime green, yellow, light orange, orange, and pink.
Once again, indigo is a buy signal, while pink signals a maximum bubble that is just about to burst. This chart was created by the same person who created the Bitcoin Rainbow Chart.
Bitcoin Rainbow Chart: The Final Verdict
As we have seen, Bitcoin Rainbow Chart is an old tool and not at all difficult to use. It is great for visualizing the state of the market and learning something about Bitcoin’s behavior over time. It comes with its pros and cons, but it should be quite safe to use. As long as you remember that it is not fully reliable on its own, that is.
FAQs
Is the Bitcoin Rainbow Chart Accurate?
Bitcoin Rainbow Chart is not completely accurate, as it doesn’t involve daily price movements. As such, it is not a good choice for short-term trades. It is, however, a good way to study price performance over time.
What Is Rainbow Chart?
Rainbow Chart is a chart featuring color bands that signal the best investor behavior based on the price position. It is a good and fun way to understand where Bitcoin price stands in the long term.
When Was the Bitcoin Rainbow Chart Created?
Bitcoin Rainbow Chart was created over eight years ago. It first emerged in 2014 as a fun way of looking at long-term price movements. However, it disregards daily volatility, which its creator considered as “noise.”
Who Created Bitcoin Rainbow Chart?
The chart was created by a Reddit user called Azop. He posted it for no personal gain, simply wishing to share a way of reading patterns that they noticed. The user has been posting these charts for years since 2014.
