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What is a Bitcoin Rainbow Chart? It's no secret that the cryptocurrency market is volatile. Since the price of Bitcoin tends to rise and fall dramatically, investors are always looking for a tool to streamline making...

By Eric Rosenberg

This story originally appeared on Due

It's no secret that the cryptocurrency market is volatile. Since the price of Bitcoin tends to rise and fall dramatically, investors are always looking for a tool to streamline making efficient investment choices.

The Bitcoin Rainbow Chart is one of the many tools invented to create an easy visual guide to investing in this cryptocurrency. As the price of Bitcoin rises and falls, the rainbow chart is designed to help investors determine the appropriate times to buy and sell their tokens. It also allows you to compare Bitcoin's current price to historical trends.

Let's take a closer look at the Bitcoin Rainbow Chart and how you can efficiently build your investment portfolio.

Key Takeaways

  • The Bitcoin Rainbow Chart reflects a logarithmic growth curve.
  • The chart uses various colors to highlight good times to buy or sell Bitcoin.
  • Although a helpful visual, investors should look beyond the Bitcoin Rainbow Chart when making investment decisions.

What is a Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a tool that investors use to assess the current value of the cryptocurrency in relation to the big picture. Within the chart, you'll see a rainbow of colors that reflects a logarithmic growth curve, which investors use as a mathematical tool to forecast the possible future price of Bitcoin.

When looking at the rainbow chart, you'll also see the price of Bitcoin over time. Notably, the chart's designers didn't want daily fluctuations in price to throw off its data. Instead, the chart ignores the noise of market movements throughout the day to focus on the overarching Bitcoin price trends.

Why is Bitcoin so Volatile?

Bitcoins are produced through a process called mining. Miners are nodes in Bitcoin's network that solve complex computational math problems to earn the next "block" of Bitcoins. Mining has a dual purpose: minting new Bitcoins that enter circulation and auditing the blockchain the make sure all transactions are valid and no double-spending is occurring.

Because Bitcoin mining requires robust hardware and significant energy, it's costly, slow, and only sometimes financially rewarding. Still, it has attracted considerable interest in recent years because of the decentralized nature of the Bitcoin blockchain and its status as a kind of modern precious metal.

Unlike the gold standard or fiat currency, Bitcoin is a new and mostly untested currency. It's not used in most people's everyday lives and has yet to be accepted by most retailers and vendors as a legitimate form of payment.

Bitcoin is volatile because its price is dependent on supply and demand. The price will swing depending on how many Bitcoins are in circulation, how much people are willing to pay for the tokens, and how close the currency is to its 21 million Bitcoin limit.

This limit was purposefully put in place by Bitcoin's inventor so miners couldn't keep minting coins to the point of causing wild price fluctuations. Hype for Bitcoin in the media or negative press can also lead to volatile Bitcoin prices. For example, some experts argued the recent collapse of Silicon Valley Bank led to increased interest in cryptocurrency products, pushing up the price of Bitcoin.

What happened to Bitcoin's price in 2022?

2022 was a particularly volatile year for economies worldwide. Inflation in the United States led to the Federal Reserve instituting a series of aggressive rate hikes, which made borrowing more expensive to reduce discretionary spending. As rates increased, they damaged corporate profits, and many tech companies laid off thousands of employees.

The Russian invasion of Ukraine also led to widespread economic uncertainty last year. Energy prices skyrocketed, particularly in Europe, as access to Russian energy sources became limited.

Bitcoin saw its price fall from over $60,000 at the end of 2021 to under $20,000 at the end of 2022. The collapse of FTX in November 2022 marked a particularly low point for Bitcoin, as investor confidence in the speculative asset seemed low.

However, the price of Bitcoin has since rebounded and is seeing positive growth in 2023. As inflation and rate hikes ease up, consumers are starting to spend more and feel more comfortable putting money toward something as risky as Bitcoin.

Who Created the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart hit the scene when a Reddit user, Azop, introduced the chart to track the price of Bitcoin. The chart is meant to predict future market trends without the distractions of daily market volatility.

How Does the Chart Work?

The chart superimposes the price of Bitcoin onto a rainbow. Since the logarithmic growth curve intends to forecast the future price of Bitcoin, different colors are intended to highlight the prime opportunities for buying or selling it.

In general, investors use this chart as a long-term valuation tool. But the predictions made within the rainbow chart aren't necessarily accurate. It's simply one way to assess Bitcoin's current price levels quickly.

At the end of each 24 hours, the chart is updated with the daily close price. With that, you'll filter through the fluctuations within a single day to better assess the bigger picture.

A Guide To The Bitcoin Rainbow Chart

The appeal of the rainbow chart is that it seems to provide clear advice on what actions you should take in your portfolio, at least according to the chart's measurements. Here's a breakdown of what the colors mean:

  • Red: When the price of Bitcoin is in the red, the Bitcoin Rainbow Chart indicates a "maximum bubble territory." With that, it's a good time to sell Bitcoin but not to buy it.
  • Orange: When the price of Bitcoin is in the orange, it's in the "FOMO intensifies" stage, which means that the price is relatively high. With that, it's a wise time to sell Bitcoin but not to buy it.
  • Yellow: When the price of Bitcoin is in the yellow, the Bitcoin Rainbow Chart indicates that the price is neither too high nor too low. With that, there's little advantage to either buying or selling the coin.
  • Light green: When the price of Bitcoin is in the light green, the Bitcoin Rainbow Chart indicates that the price is on the low side. With that, there is potential for growth, making it a reasonably good time to buy but not sell.
  • Green: When the price of Bitcoin is in the green, the Bitcoin Rainbow Chart indicates that the price is on the low side. Since it is potentially undervalued, there is some potential room for growth, making it a reasonably good time to buy but not sell.
  • Blue-green: When the price of Bitcoin is in the blue-green, the Bitcoin Rainbow Chart indicates that the price is on the low side. With that, there is a lot of growth potential, making it a good time to stock up.
  • Indigo: A price at the indigo level is about as good as it gets, otherwise known as a fire sale, making it a perfect time to buy Bitcoin.

By following the rainbow chart, it's easy to see where the price of Bitcoin stands based on the color.

Advantages and Disadvantages of the Bitcoin Rainbow Chart

As with all investment tools, using the rainbow chart has pros and cons.

Let's start with the pros:

  • Reasonably good track record: Since the chart launched in 2014, it has remained relatively accurate.
  • Easy to use: It's easy to check in with the rainbow chart before buying or selling Bitcoin.

Now for the cons:

  • Not a foolproof result: Although the chart has been right so far, that doesn't mean it will always be a good judge of Bitcoin's price direction.
  • Doesn't look at the daily fluctuations: If you want to buy and sell Bitcoin throughout the day, this chart won't be much help to you.

Should You Rely on the Rainbow Chart?

The Bitcoin Rainbow Chart is a helpful visual to assess where the price of Bitcoin stands quickly. But long-term research has yet to back-up the chart. When dealing with highly volatile cryptocurrencies, things can change rapidly.

Since past performance doesn't necessarily indicate future results, relying on the rainbow chart won't always translate into blockbuster investment returns. Solely relying on this chart could mislead your investment decisions if the price of Bitcoin behaves unexpectedly.

The rainbow chart might be a good place to start investment decision-making. But it's important to follow up on your initial discovery with other information about the state of the Bitcoin market before moving forward with an investment decision.

How to Invest in Cryptocurrency

Most successful cryptocurrency investors regularly follow changes in the market to guide their decisions. Since the cryptocurrency market is highly volatile, constant monitoring seems to be one path to success.

However, only some investors interested in the cryptocurrency have the time or inclination to monitor the markets consistently. The good news is that with the spread of artificial intelligence, it's possible to find investing software that protects your money from volatility and price swings.

At the same time, nothing in the crypto space is guaranteed, and you shouldn't invest any money you need to survive. Multiple established crypto exchanges collapsed in 2022. Investors should be wary of any cryptocurrency that makes investors promises that seem too good to be true.

The Bottom Line

The Bitcoin Rainbow Chart is one tool available to cryptocurrency investors. If you are trying to determine the right time to buy or sell Bitcoin, this tool can give you a quick take on the situation. However, it shouldn't be the only tool you use to determine the appropriate time to buy or sell Bitcoin.

The post What is a Bitcoin Rainbow Chart? appeared first on Due.

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