The Bitcoin Rainbow Chart is a logarithmic BTC price chart that uses color bands to show the range of possible prices for Bitcoin at any given time. Since it draws data from more than a decade-long history of Bitcoin price movement, it can be an especially useful tool for traders and investors who seek assistance when making price predictions and informed decisions.
In this article, we will delve into what the Bitcoin Rainbow Chart is, how it works, and how it can potentially be used to predict BTC price movements and make informed investment decisions.
What is the Bitcoin Rainbow Chart?
The Bitcoin Rainbow Chart is a visual representation of Bitcoin’s historical price movements plotted against its logarithmic price scale and time. The chart is founded on a concept known as logarithmic regression, which assumes that as time goes by, Bitcoin’s price increases ever faster in absolute terms, but at a decreasing rate in relative terms.
The Bitcoin Rainbow Chart is a graphic depiction of Bitcoin’s historical price movements, displayed in a color-coded format. Image source: CoinCodex
The Rainbow Chart aims to provide insights into potential price trends and market cycles by utilizing a color spectrum that corresponds to various price ranges, making it well-suited for gauging Bitcoin‘s price position relative to its historical price movements. The color of each band represents a specific price range, which traders can use as potential support and resistance levels.
Generally speaking, the different colors on the chart indicate whether BTC is undervalued or overvalued – the colder colors indicate a good buying opportunity, while the hotter colors indicate a good selling opportunity.
How to use the Bitcoin Rainbow Chart to predict BTC price?
By assessing trends, price ranges, and identifying potential overbought or oversold conditions, Bitcoin traders can use the chart as a supplementary tool to make more informed trading decisions.
Let’s say you are considering buying Bitcoin at its current price level of about $30,000 and plan on holding it until April 2025, about a year after the next Bitcoin halving (which has historically been the time when BTC reaches its halving cycle peak).
From the image below, we can see that the Bitcoin Rainbow Chart predicts an upper price level for BTC in April 2025 of $354,784 and a lower bound of $27,954, with an average Bitcoin price across the nine bands of $136,566.
There are 9 price bands on the Rainbow Chart – the dark red colored band indicates that BTC is heavily overbought, while the dark blue one signals BTC is heavily undervalued. Image source: CoinCodex
It is worth pointing out that Rainbow Chart relies solely on historical price data and does not consider external factors that can impact Bitcoin’s price, such as news events, market sentiment, or regulatory changes.
You shouldn’t rely on the Rainbow Chart exclusively, but instead, complement the chart’s analysis with other fundamental and technical indicators. For instance, you could use a tool like CoinCodex’s Bitcoin price prediction algorithm, which is more finely tuned and provides more granularity than the Rainbow Chart, or focus on broader economic factors to inform your investment decisions.
It is worth noting that Bitcoin’s historical price movements have been heavily influenced by past halvings, which are cyclical events that reduce the amount of BTC that enters circulation by half roughly every 4 years (every 210,000 blocks, to be exact). To learn more about the upcoming Bitcoin halving, and what we can expect about its impact on the price of Bitcoin, check the video below.
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