The cryptocurrency market is notoriously volatile, with traders as likely to earn from it as they lose their capital. Over the years, investors have developed various means to create somewhat sound marketing strategies. Not all of them are efficient. However, some of them are fairly accurate, depending on how well the trader understands the concept or tool.
In a highly volatile market like the Bitcoin market, staying on top of the trends and predicting the value of a coin over a long time is essential to making good decisions. This is why tools like the Bitcoin rainbow chart were invented.
What is Bitcoin rainbow chart?
The bitcoin rainbow chart is also referred to as the BTC rainbow chart and is a tool that is used to study the price of bitcoin in the long-term market. In other words, a bitcoin rainbow chart is a long-term tool for studying the value of bitcoin.
The Bitcoin rainbow chart was initially built to study the long-term value of bitcoin without being distracted by the daily fluctuations in price. It is designed to predict the future price trends of bitcoin using a logarithmic growth curve.
This Bitcoin valuation chart was named the “rainbow chart” because of the colorful bands used to indicate the Bitcoin market trend at a given time.
How was the Bitcoin rainbow chart created?
The first Bitcoin rainbow chart was created in 2014 by a Reddit user named Azop to track the price of bitcoin and predict future market trends without being distracted by market volatility.
The chart featured colorful bands and was quite accurate; hence, it earned the nickname “bitcoin rainbow chart.” Like every other aspect of the decentralized bitcoin community, the bitcoin rainbow chart has been subject to several improvements and innovations to produce what is available today. Some of these innovators include Trelololo, another Reddit user who introduced the logarithmic curve to the chart in the same year of the launch, and Uber Holger, who developed the chart and featured it on Blockchain Center.
How does the bitcoin rainbow chart work?
The Bitcoin rainbow chart was initially featured on Blockchain Center, and it operates by displaying colorful bands over the logarithmic growth curve in a bid to determine the market sentiment at every stage. Each color in the rainbow band represents a stage, and as the prices move past each stage, the bitcoin rainbow chart points out possible opportunities for buying or selling bitcoin.
How to interpret the bitcoin rainbow chart
The Bitcoin rainbow chart reads like a graph with an x-axis representing time and a y-axis representing the price of bitcoin. There are colored bands that make up the rainbow, indicating the market sentiment at different bitcoin prices. These colored bands indicate when it is an excellent time to sell or buy bitcoin.
Bitcoin Rainbow Chart on CoinStats
Let us take a look at what every color on the bitcoin rainbow chart signifies:
The red color on the bitcoin rainbow chart signifies that bitcoin is a bubble and there is a possible increase in price. The red color is divided into red and dark red, indicating that bitcoin is at the maximum bubble level. The bitcoin rainbow chart shows that buying bitcoin at this stage is not a good idea.
The orange color indicates that the currency is picking up and getting more popular. It is divided into orange, which indicates that it's best to research and learn more about the coin, and dark orange, which indicates that many people are in a hurry to buy the coin because they’re scared of missing out. It is also not a good idea to buy bitcoin at this stage.
The yellow color signifies neutral ground. At this stage, holding your coins and seeing what happens next is best.
The rainbow chart has three stages of the green color, which are
The light green stage
At the light green stage, bitcoin has gained little value and may show some possibility for growth.
The blue-green stage
At the blue-green stage, bitcoin still has only little value but may not show any possibility for growth.
At the green stage, bitcoin has gained even more momentum but is still undervalued. At this point, there is no expected rise or fall in the price of bitcoin. This signifies the best time to get and hold your coins.
At this stage, bitcoin is still undervalued and cheap to buy but has shown a lot of possibility for growth. It is safe to buy bitcoin at this stage.
This is when bitcoin has taken off and is at its lowest price. The Indigo color on the bitcoin rainbow chart indicates the best time to buy bitcoin.
The bitcoin rainbow chart also uses a logarithm regression chart to represent non-linear variables, which in this case are time and price. However, they do not have any scientific basis, nor are the results of the charts dependent on any scientific facts or research.
Pros and cons of using the bitcoin rainbow chart
A Bitcoin rainbow chart is a helpful tool for evaluating the bitcoin market. Let's examine some pros and cons of using the Bitcoin rainbow chart.
Pros of using the Bitcoin rainbow chart
Here are some perks of using bitcoin rainbow charts:
- Since the chart launch in 2014, it has remained accurate, showing eight years of efficient and accurate results.
- The logarithmic regression curve used in the bitcoin rainbow chart can be used to track other forms of ever-changing market investments.
- The bitcoin rainbow chart helps users to make informed decisions on whether it is a good idea to buy or sell coins at a particular time.
- The chart is simple and can be used by any bitcoin investor, including people that are new to trading bitcoin.
Cons of using Bitcoin rainbow chart
Here are some things to think about when using bitcoin rainbow charts:
- The chart only studies and produces information for the long-term market value of the bitcoin
- There is no scientific fact or research to back up the result and information provided by the chart. This means there’s no way of determining its authenticity.
- Although the bitcoin rainbow chart has been accurate since its inception, it is possible that it could be wrong at any time without prior warning or notice.
- You cannot be completely reliant on the Bitcoin rainbow chart for all your investment decisions.
The difference between the bitcoin rainbow chart and other long-term bitcoin valuation tools for Bitcoin
There are other tools for evaluating the price of bitcoin in the market, such as the stock-to-flow model.
The Bitcoin rainbow chart and the stock-to-flow model represent their data in charts; both have colorful indicators. Still, while the Bitcoin rainbow chart highlights long-term information on Bitcoin, the stock-to-flow model provides data in halves.
Also, the bitcoin rainbow chart considers other market factors outside demand and supply to provide information. In contrast, the stock-to-flow model only provides information based on demand, supply, and production rate.
However, both charts are accurate depending on the type of information required. It is not advised to depend solely on these valuation tools for all your crypto investments.
Is the Bitcoin rainbow chart reliable?
Properly studying the crypto market can help you make informed investment decisions. However, it is virtually impossible to predict the market trend and future Bitcoin prices completely.
The bitcoin rainbow chart has proven accurate since its launch in 2014. However, it is not a foolproof tool for predicting the price of bitcoin. The bitcoin rainbow chart provides essential information to help you navigate your investments and make sound investment choices.
So far, the bitcoin rainbow chart has recorded a 100% accuracy level, which makes it a reliable source of data and information to guide your investment choices.
However, since there is no scientific evidence backing the bitcoin rainbow chart, it is unsafe to base all your decisions on information from the chart. The chart could make inaccurate predictions without warnings, and investment decisions based on such predictions might suffer huge losses.
It is advisable to combine the bitcoin rainbow chart with other long-term bitcoin price analysis tools like the stock-to-flow model chart, the network value to transaction ratio, thermocap, Mayer multiple, and market cap, among other tools.
Also, a proper study of the bitcoin market trends is required to help you make the most profitable use of data from the bitcoin rainbow chart.
The Bitcoin rainbow chart was initially designed as a fun and creative way of tracking long-term bitcoin prices. It has performed tremendously since its inception and has become one of the most popular tools for bitcoin price analysis.
Information from the chart can help investors decide when it is best to buy, sell, or hold coins because the results on the chart are based on the market behavior at a given time. The Bitcoin rainbow chart has proved reliable, and many investors use it alongside other bitcoin price evaluation tools.