The Benefits of Bitcoin’s Rainbow Chart
The so called Bitcoin Rainbow Chart is a Bitcoin price chart that is particularly easy to understand.
However, some clarifications must be made.
How the Bitcoin rainbow chart is made.
First, it should be mentioned that the graph shows the price development of BTC from 2012 to the present on a logarithmic scale.
2012 is the first year halvingand what happened to the price of Bitcoin in previous years is too abnormal to be considered in reasoning about long-term trends.
The logarithmic scale serves precisely to give better visibility to percentage increases in the long term. Logarithmic scale graphs are often more understandable than linear scale graphs over long periods, precisely because they do not show changes in absolute values, but in percentages.
In the short term, it is more useful to compare changes in absolute values, but in the long run such changes can be misleading, especially when they are very high, as in the case of Bitcoin.
The logarithmic scale, on the other hand, shows changes in percentagethat is, to show the long-term changes in a way that is comparable to each other, even if they start from very different levels.
But what is most striking is the rainbow.
The Bitcoin Rainbow.
This is actually not a real rainbow, but nine variable price ranges over time, growing in very easily identifiable arcs on a logarithmic scale.
However, one must bear in mind that these are totally arbitrary ties, with an equally arbitrary trend.
Although they are arbitrarily designed and drawn, they still seem to give some precise indications.
The most interesting bands are the outer ones, i.e. the two bottom ones (blue and light blue), and the two top ones (pink and dark red).
Note that three times in Bitcoin’s history, the price has gone beyond the outer bands of the rainbow graph.
The Irregularities of Bitcoin’s Rainbow Chart Reading.
The first anomaly occurred in late 2013, during the largest post-halving speculative bubble ever on Bitcoin’s price.
The large range in November 2013 ended at $650, then rose to $800 in February 2014. Bitcoin’s price, on the other hand, rose to $1,100 in late November, then fell and returned to $1,000 between December 2013 and January 2014.
In fact, it was pretty clear even then that these prices were excessively high, given that in early 2013 the entry level was only $13.
During the following bear market, and the subsequent speculative bubble of 2017, there were no anomalies, only a decline in the lower areas and an increase in the higher ones.
In fact, even in the 2018/2019 bear market, there were no anomalies because the other was during the March 2020 financial market crash due to the outbreak of the pandemic.
At that time, the lowest band on the rainbow chart reached up to $5,000, while for a few days the price fell to 4000 dollars.
However, this was a very short anomaly, lasting only a few weeks.
The third anomaly is ongoing.
The lowest band on the rainbow chart for Bitcoin’s price is currently going as low as $19,000, although it is heading towards $20,000.
As Bitcoin’s price has fallen below $19,000 in recent days, the third anomaly in the rainbow chart is underway.
Is the chart reliable?
At this point the question is: Is this chart still reliable? That is, is the arbitrarily drawn curve for these price ranges still to be considered valid now?
The graph is reliable for explaining and interpreting past Bitcoin price trends, but it has no real predictive properties.
In other words, it should not be considered reliable in terms of the future trend of Bitcoin’s price.
It only describes the last one, making it well understood that Bitcoin’s price has so far followed an upward parabola consisting of three fairly similar cycles.
Bitcoin price cycles.
Taking the highs of each cycle as a reference, the price of Bitcoin at the end of 2013 rose above the highest band on the rainbow chart. At the end of 2017, however, it fell all the way back into the highest dark red band, while in 2021 it stopped at the third to last band, the orange band.
This is precisely why it is possible that the curve was drawn optimally up to 2020, while from 2021 onwards it may have been drawn too optimistically.
Referring to the lows during the three post-bubble bear markets, the first in 2015 was perfectly within the lowest blue band, while the second in 2020 was below this band. However, it was then a black swan, due to the unpredictable outbreak of the pandemic.
However, the low point of the current post-bubble bear market is also well below the lowest band on the rainbow chart, reinforcing the hypothesis that from 2021 onwards the design of these bands is no longer accurate.
The description of the bands
Each band has been given a descriptive name.
However, care must be taken because these are completely arbitrary names and they advise what to do in case the price is within them.
For example, the green band was called “accumulate,” the blue band “buy,” and the blue band “practically on sale.” Actually, these names were only assigned by analyzing the past behavior of the price, so they should in no way be taken as predictions for the future.
The bright orange band was called “does it bubble?” and the orange “FOMO intensifies.” Even more explicit are the bright red and dark red bands, called “sell” and “maximum bubble territory” respectively. For example, during 2021, the price of Bitcoin never entered the “sell” band, but after entering the “FOMO” band, it began to decline.
One will notice how at one point the arc appears to stop, right in 2021/2022, and from that point onwards it appears to continue in a straight line, although since this is a logarithmic scale graph, such a line actually not straight.
Conclusion
This is therefore a graph that must be taken with caution.
It turns out to be very useful to easily understand the Bitcoin price trend from 2012 to 2020, but it starts to creak right from 2021/2022.
Also, it should not be taken as a predictive tool at all because it is not based on any scientific basis that is useful for predicting the future trend of Bitcoin’s price.
