what is the bitcoin rainbow chart

Ever since the price of bitcoin started getting more exposure in the world, we have all wanted to find the most reliable way to be able to anticipate when we need to sell and buy bitcoin to make a profit.

The best-known and most trusted methods are in trading. However, there was one tool that has been gaining more importance due to its efficiency: The Bitcoin Rainbow Chart. So, in this article, you will learn more about this tool.

What is the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a long-term investment tool introduced in 2014. There are 7 colors that follow a logarithmic regression, so we will describe them from top to bottom:

  • 1st red: (Maximum Bubble Territory.) This is the peak time when you should sell.
  • 2nd red: (Sell. Seriously. SELL!) If the bitcoin’s price gets to this level, don’t wait until the other. The price of bitcoin is usually very short here.
  • 1st orange: (FOMO Intensifies) Since this level, the idea is that you are very cautious if bitcoin’s price continues rising because it can decrease at any moment.
  • 2nd orange: (Is this a bubble) There is always a part where you believe that the growth of bitcoin’s price is not organic.
  • Yellow: (HODL) This is the middle of the road and you should only think of holding. You know that bitcoin’s price can continue growing.

Bitcoin Rainbow Chart

Source: Blockchain Center
  • 1st green: (Still Cheap) This is the last chance you have to buy cheap bitcoin. This is what happened on September 7th when bitcoin’s price reached 18k.
  • 2nd green: (Accumulate) When you find bitcoin at this level, you only need fresh cash to buy as much bitcoin as you can. As you can see in the picture below, time is saying that this tool is right.
  • Sky Blue: (Buy) Is it any clearer? Buy, buy. If the bitcoin price continues to meet this indicator, your bitcoin retirement account will thank you.
  • Blue: (Basically a Fire Sale) Bitcoin prices this low rarely happen and in this last bear market we have seen it more often than not.
How Accurate is the Bitcoin Rainbow Chart?

So far, the bitcoin rainbow chart has been met in almost 100% of bitcoin history. The only time when the price of bitcoin went outside the limits of this indicator was in late 2013. On the other hand, you can see that every time bitcoin halving happened in late 2012, mid-2016, and 2020, the price of bitcoin always had the biggest rise.

The next bitcoin halving will be in March 2024. So, if you have a website, you can embed this indicator with this code.


Bitcoin Rainbow Chart vs Stock To Flow

The stock-to-flow price model was created by anonymous Twitter user PlanB, who claims to be a Dutch institutional investor with a legal and quantitative finance background who manages about $100 billion in assets.

The model involves calculating a ratio based on the existing supply of an asset versus the amount coming into circulation. The higher the figure, the longer it will take for production to meet existing demand and the scarcer a good will be.

So, these 2 bitcoin price prediction models are the most famous ones. If you analyze them, you can see that the bitcoin rainbow chart is more accurate considering bitcoin’s price history. This indicator has only one exception in 2013. However, as you can see in the tweet below, there are many exceptions in the stock-to-flow model.

Finally, It is true that these two indicators that try to predict the bitcoin price in the long term are a very good reference. Traders appreciate it, but in the end, I believe that we should not depend on our investment strategies or traders on one method. Let’s never stop researching new ways.

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