Crypto Basics Crypto Metrics

Bitcoin Rainbow Chart 

If you invest in the cryptocurrency market, knowing when to buy or sell your assets will always be difficult. Understanding past market movements can be helpful when making investment decisions. In 2014, Reddit user Azop created the Bitcoin Rainbow Chart. Then, Über Holger developed it further and published it on Blockchaincenter.net to help investors determine when Bitcoin is in a bull market or bear market. 

In this article, we’ll explain the Bitcoin Rainbow Chart, how to use it, and its advantages and disadvantages.

What Is the Bitcoin Rainbow Chart?

The Rainbow Chart is a tool used to determine Bitcoin’s value in the long term. The likely future direction of Bitcoin’s price is predicted using a basic logarithmic regression chart. The metric is named after the nine rainbow-colored bands it generates.

Each color has a different meaning:

  • Dark red – Maximum bubble territory!
  • Red – SELL!
  • Dark orange – FOMO intensifies.
  • Orange – This could become a bubble very soon
  • Yellow – HODL!
  • Light green – Still cheap!
  • Green – Accumulate
  • Bluish Green – BUY!
  • Blue – Fire Sale 

The Bitcoin Rainbow Chart is not intended to be investment advice. It only serves an educational purpose. 

The Rainbow Chart also applies to other cryptocurrencies like Ethereum (ETH).

Bitcoin Rainbow Chart Advantages and Disadvantages

Advantages

  • It has been accurate since it was created (2014).
  • Logarithmic regression chart models are beneficial in highly volatile assets. 
  • The chart is easy to understand. 

Disadvantages

  • It only shows long-term price movements.
  • It was created without any scientific basis.
  • It can eventually be wrong without any warning.
  • It needs more data (time) to demonstrate its accuracy. 

How to Use the Bitcoin Rainbow Chart

The Bitcoin Rainbow Chart can help you assess the asset’s market changes, BTC price movements, and volatility in the long term. The Bitcoin price action has proven that it experiences market cycles in which the price can increase parabolically and drop quickly. It also has very high daily volatility, which investors must be aware of.

Keep in mind that using only the BTC Rainbow Chart as an indicator to invest in the crypto market is not a good strategy. The Bitcoin Rainbow Price Chart can help the investor determine the point in the market cycle the asset is currently at. Knowing that, you can combine it with your investment strategy or other long-term indicators, such as the Relative Strength Index (RSI). 

Final Take

Understanding market cycles and how to use indicators will make you a more effective and knowledgeable investor. The Bitcoin Rainbow Chart has been accurate since it was created but remember that past performance may not always predict future movements. So, don’t rely only on The Bitcoin Rainbow Chart and always combine it with other metrics to have a higher probability of making a successful investment.

Let’s face it, trading any market can often be a difficult and risky endeavor. This is especially true for the crypto market. Day traders, swing traders and long-term investors need all the useful information and tools they can get. Glassnode, the crypto industry’s leading blockchain data and intelligence platform, equips investors and traders with the most comprehensive on-chain insights to help them make better investment and trading decisions.

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