The Bitcoin Rainbow Chart

The Bitcoin Rainbow Chart: Definition and Applications

The Bitcoin Rainbow Chart is a graphical tool for analyzing Bitcoin price trends. It uses colored bands to visualize historical price movements, helping investors determine if Bitcoin is undervalued, overvalued, or fairly priced. Below is a detailed explanation:

I. Origin

• In 2014, Reddit user "azop" created the first Bitcoin Rainbow Chart by overlaying rainbow-colored bands on a logarithmic price chart to satirize Bitcoin’s extreme price volatility.

• In 2019, developer Rohmeo launched Version 2, introducing a logarithmic regression model and curved color bands to enhance data scientific validity and visualization.

II. Principle

• The chart is based on logarithmic regression, dividing historical price levels into intervals represented by different colors:

  • Deep blue at the bottom signals extreme undervaluation.

  • Deep red at the top indicates extreme overvaluation.

  • Intermediate colors represent transitional stages.

III. Key Applications

1. Simplifying Investment Decisions

• The intuitive color-coding allows investors to quickly assess Bitcoin’s valuation status (overvalued/undervalued/fair).

• Especially helpful for novice crypto investors to understand market conditions and make decisions.

2. Aiding Long-Term Investment Strategies

• Focused on long-term analysis, the chart uses multi-year price data to:

  • Help investors identify long-term trends.

  • Formulate strategies based on historical performance, mitigating short-term volatility risks.

3. Reflecting Market Sentiment

• Color bands indicate market psychology:

  • Bottom blue zones suggest panic and selling pressure.

  • Top red zones signal greed and speculative bubbles.

• Investors can gauge overall market sentiment to make informed choices.