What is the Bitcoin Rainbow Chart? A Complete Guide

The Bitcoin Rainbow Chart is a tool designed for long-term Bitcoin price analysis, utilizing a logarithmic regression model. Since its creation in 2014, it has been a colorful and accessible way for new and seasoned traders to visualize the broader trends in Bitcoin's price movements. While it may look simple, effectively using the chart requires distinguishing meaningful data from noise, a skill that sets proficient traders apart.

At its core, the Bitcoin Rainbow Chart exemplifies how technical analysis can creatively transform historical data into insights. The chart's color-coded bands aim to condense complex insights into an easily digestible format, helping even novice traders identify potential opportunities or risks. Yet, to truly benefit from this tool, one must move beyond surface-level observations and attempt to grasp the story it tells about market sentiment and price cycles.

In this article, we’ll explain the Bitcoin Rainbow Chart nontechnically, helping you understand its significance without getting lost in complex jargon or mathematics. This tool is more than just a visual; it can offer profound insights when used thoughtfully.

What is the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a technical indicator created in 2014 that has undergone several updates, with the most recent in 2021. Its primary purpose is to help traders visualize Bitcoin’s long-term price trends and market sentiment. The chart’s simplicity lies in its color-coded bands, each representing a different phase in Bitcoin's price cycle, making it easily digestible even for new traders. Despite its playful appearance, the chart is grounded in logarithmic regression curves that project Bitcoin’s potential price movements based on its history since January 2009.

The chart aims to give a snapshot of where Bitcoin stands in its price cycle — whether it's undervalued, fairly valued, or overvalued. The nine color bands are used to visually signal different market sentiments:

• Dark Blue ("Fire Sale"): Indicates that Bitcoin is extremely undervalued, often presenting a strong buying opportunity.
• Light Blue ("Buy!"): Bitcoin is highly undervalued, signaling a good time to accumulate.
• Green ("Accumulate"): The asset is somewhat undervalued, with room for growth.
• Light Green ("Still Cheap"): Bitcoin is edging toward fair value but remains undervalued.
• Yellow ("HODL!"): Bitcoin is considered fairly valued—neither a strong buy nor sell signal.
• Orange ("Is this a bubble?"): The market may be overvalued, and caution is advised.
• Light Red ("FOMO intensifies"): The fear of missing out kicks in, signaling that Bitcoin is likely overvalued.
• Red ("Sell. Seriously, SELL!"): Bitcoin is highly overvalued, and a correction may be imminent.
• Dark Red ("Maximum Bubble Territory"): Indicates extreme overvaluation, signaling a potential bubble.​

The Bitcoin Rainbow Chart doesn’t claim to predict exact price movements but offers a generalized framework for understanding where Bitcoin might be in its broader price cycle. It is essential, however, to remember that, like any technical indicator, its usefulness lies not in blindly following its signals but in understanding why it arrives at those conclusions. Combined with other tools and thoughtful analysis, it can help traders make more informed decisions.

This ethos of technical analysis underlines that indicators are best used as part of a broader strategy, not a sole guide. This ensures that traders don’t rely purely on historical patterns without considering other market forces.

Also, check out our beginner's guide to crypto technical analysis.

Bitcoin Rainbow Chart Historical Context

The Bitcoin Rainbow Chart was born from a discussion initiated by a BitcoinTalk user named Trolololo. On Oct. 22, 2014, Trolololo posted an analysis titled "Logarithmic (non-linear) regression - Bitcoin estimated value," proposing a model to project Bitcoin’s long-term price trends using logarithmic regression. This model aimed to provide a simple and effective way to gauge the price behavior of Bitcoin over time by smoothing out the sharp volatility characteristic of Bitcoin’s price history. This was the initial chart Trolololo proposed:

A Reddit user named "azop" added a creative twist to the logarithmic model. He introduced color-coded bands that segmented the price chart into various market sentiment levels, from undervalued "fire sale" zones to overvalued "bubble" territory. These colorful bands added visual appeal, making it easier for traders to interpret long-term price trends at a glance​.

Major Updates

Over the years, the Bitcoin Rainbow Chart has undergone several recalibrations to reflect Bitcoin's evolving price action better. The first major revision occurred in 2017, which coincided with Bitcoin’s monumental bull run to nearly $20,000. This update recalibrated the color bands to account for the higher volatility and the increasing capital needed to push Bitcoin prices further. Similar updates followed in 2019 and 2021 when new data was integrated to adjust the logarithmic curve and better align it with the latest market conditions. These updates kept the chart relevant by considering new price peaks and corrections.

Current Version

The most recent update, in 2023, integrated Bitcoin's evolving market structure and additional years of price data. Today, Blockchaincenter.net hosts and maintains the chart.

How Does the Bitcoin Rainbow Chart Work?

The Bitcoin Rainbow Chart is based on a central logarithmic regression line, originally proposed by Trolololo in 2014, which has been recalibrated over the years to accommodate Bitcoin’s evolving price data. Here’s an earlier version of the regression formula from 2017:

Bitcoin’s Price = 10^(2.66167155005961 * ln(days since January 9, 2009) - 17.9183761889864)

This formula captures Bitcoin's long-term price trend, leveraging logarithmic regression to estimate its future value by accounting for its historical growth patterns. In another piece on the Coin Bureau, we dig deeper into regression, using the model to analyze the relationship between Bitcoin and the Stock Market.

Let’s break down the key principles of the Bitcoin Rainbow Chart:

Regression Analysis

The chart operates on the concept of regression, a statistical method used to model the relationship between a dependent variable (Bitcoin’s price) and an independent variable (time). This allows us to derive an estimated price for Bitcoin on any given date based on the number of days since its launch. The logarithmic regression model helps project how Bitcoin’s price will evolve, smoothing out the extreme volatility that often characterizes short-term fluctuations.

Logarithmic Growth

• Exponential Decay of Returns: In the early stages, Bitcoin experienced rapid price increases, but as it matured, the rate of return slowed down—a behavior typical in many financial assets. The logarithmic scale captures this diminishing return.
• Scale Invariance: The chart uses a log-linear scale, which tracks time linearly and price logarithmically. This makes significant price moves, such as from $100 to $1,000 (10x), visually equivalent to $10,000 to $100,000​.

Historical Data Fitting

Empirical Calibration: the formula involves two constants:

• A Multiplication factor of 2.66167155005961
• A Subtraction coefficient of -17.9183761889864

These values are derived from fitting the model to historical Bitcoin price data. This process involves regression analysis, where the logarithmic model is adjusted through trial and error to minimize the difference between predicted and actual historical prices. This is an aspect of injecting subjectivity in the analysis, as calibration is.

The model is designed as a lagging indicator, deriving predictions from historical data. Over time, historical data becomes decreasingly relevant, and the model has to be recalibrated to reflect the evolving market. There is always a risk of overfitting, where the model may be too closely tailored to past data, potentially reducing its predictive power for future events.

Market Sentiment Reflection

The chart's rainbow aspect is reflected in its color-coded bands. Each band represents a sentiment level, ranging from “Fire Sale” (blue) to “Maximum Bubble Territory” (dark red). These bands visually represent market sentiment, helping traders identify potential buying or selling points.

Connecting With the Bitcoin Rainbow Chart

1. Central Regression Line
   • The formula represents a central trend line of the Bitcoin Rainbow Chart.
   • It is derived by fitting historical Bitcoin price data to the logarithmic regression model.
2. Colored Bands
   • Multipliers: Bands above and below the central line are created by multiplying or dividing the line by constant factors.
   • Market Sentiments: Each band corresponds to different market sentiment levels (e.g., "Buy," "Sell," "Bubble").
3. Visualization
   • Log-Linear Scale: The chart uses a logarithmic-linear scale to represent exponential growth linearly.
   • Trend Analysis: Helps visualize whether the current price is above or below the expected trend based on historical data.

Conclusion

While the Bitcoin Rainbow Chart provides valuable insight into long-term trends, it's essential to recognize its limitations. The formula is calibrated to past data, meaning it can only give an approximation rather than a precise forecast. Like any technical analysis tool, the chart isn’t a crystal ball—it works until it doesn’t. External factors, such as market regulations or technological innovations, could render the model less predictive in the future.

For traders, it’s vital to remember that reliance on a single indicator can be risky. The Rainbow Chart should be one of many tools used in a broader trading strategy to ensure well-rounded decisions are grounded in multiple data points.

How to Use Bitcoin Rainbow Chart

The Bitcoin Rainbow Chart is a tool designed for long-term analysis, giving investors a visual snapshot of where Bitcoin’s price might be headed based on historical trends. Here are some practical ways to use this chart in your trading or investing strategy:

Identifying Bitcoin Peak Patterns

One fascinating way to use the Rainbow Chart is by analyzing peak patterns. As crypto analyst Benjamin Cowen pointed out, Bitcoin tends to form its price peaks at different color bands. With each subsequent market cycle, the next peak typically occurs about 2.5 bands lower than the previous one. 

This phenomenon reflects exponentially diminishing returns over time, where Bitcoin’s growth slows down as the asset matures. Investors can use this information to gauge how far Bitcoin’s price might rise in the next bull cycle.

For example, if Bitcoin reached the purple territory in one cycle, Cowen's observation would suggest that the next peak could be found around the orange or yellow bands. This gives traders a reference point for identifying possible price tops and understanding the asset’s price dynamics as it evolves.

Combining It with Other Indicators

While the Rainbow Chart is useful, it shouldn’t be used in isolation. Effective trading strategies often combine multiple technical indicators to strengthen or contradict a particular signal. Some complementary tools include:

• Volume Indicators: High trading volumes near specific price bands can validate market trends.
• Moving Averages: These provide additional insight into price momentum and help smooth out volatility.
• Market Depth: Observing buy and sell orders at certain price levels can provide a sense of whether the market agrees with the sentiment suggested by the Rainbow Chart.

If the Rainbow Chart suggests that Bitcoin is approaching a critical price zone (e.g., entering "FOMO" or "Maximum Bubble Territory"), cross-referencing this with volume spikes or resistance levels can either validate the trend or warn of potential market reversals.

Avoiding Short-Term Analysis

One critical limitation of the Bitcoin Rainbow Chart is that it is unsuitable for short-term analysis. The chart is designed to smooth out the day-to-day fluctuations by focusing on Bitcoin’s broader price trajectory over the long term. Because it draws from data stretching back to Bitcoin's inception in 2009, its projections help understand general market direction but lack the precision needed for intraday or weekly trading.

Conclusion

The Bitcoin Rainbow Chart is a helpful visual tool for assessing Bitcoin’s long-term price movements and market sentiment. By analyzing peak patterns, cross-verifying signals with other indicators, and keeping a long-term perspective, traders can use this chart to inform their investment decisions. However, like any technical analysis tool, its effectiveness depends on how it is used with a broader strategy and market research.

Is the Bitcoin Rainbow Chart Accurate?

"It’s Not Broken Until It Is" Narrative

There's a common understanding that models and indicators work until they don’t. This concept applies to the Bitcoin Rainbow Chart as well. The chart's creator, Trolololo, acknowledged this when he said:

"This logarithmic regression is way better than the linear regression. But it's just a model, not a crystal ball." 

This statement emphasizes that while the Rainbow Chart has been an effective tool for understanding Bitcoin’s long-term price trends, it isn’t foolproof. The model has been adjusted over time to account for anomalies. For example, during significant price drops, such as those in 2020 and 2022, Bitcoin’s price fell below the previously established lowest band. To account for this, a new band, humorously labeled "Bitcoin is Dead," was introduced at the bottom to accommodate the crash. 

These adjustments demonstrate that the Rainbow Chart is regularly corrected to stay relevant. Still, they also highlight that we can never know for sure if we are experiencing another anomaly in real-time.

What is the Reliability of the Chart?

The reliability of the Bitcoin Rainbow Chart depends mainly on how it is used. Throughout Bitcoin’s market cycles, the chart has proven relatively consistent in capturing long-term trends. However, there have been instances where the price has moved outside the expected bands, especially during significant market corrections.

• Long-Term vs Short-Term Reliability: The chart is much more reliable for long-term analysis. For instance, if the chart indicates a "BUY" now and signals "SELL" several years later, the probability of making a successful trade based on this model is high. However, when applied to shorter time frames, the chart is less reliable, as it smooths out day-to-day fluctuations, which may not accurately reflect short-term market volatility.
• Evolution of Predictions: Historical predictions based on earlier versions of the model have also evolved. For example, using the logarithmic regression model from 2017, we can estimate the date when BTC hits $100,000 to around November 2024. However, updated models incorporating new data have pushed this timeline toward the end of 2025. This illustrates the need for continual calibration of models as market conditions evolve.

In conclusion, the Bitcoin Rainbow Chart is a useful tool for visualizing long-term market trends, but it’s essential to treat it as one piece of a broader analysis. Adjustments to the chart, like introducing new bands during downturns, reinforce the idea that no model is infallible. As Trolololo said, it’s not a crystal ball—it works until it doesn’t.

Limitations of the Bitcoin Rainbow Chart

Here are some limitations of the Bitcoin Rainbow Chart:

• Consistent over the long term, speculative in the short term: The chart is reliable for long-term price trends but speculative when applied to short-term market conditions.
• Subjective: The constants used in the logarithmic regression line and the calculations for the colored bands are based on subjective choices, even though the model is scientifically grounded. This subjectivity can introduce inaccuracies.
• Not useful for intraday trading or derivatives trading: The chart smooths out short-term price fluctuations, making it ineffective for day traders or those trading on shorter time frames.
• Frequent calibrations: Regular updates to the model improve its future accuracy but create uncertainty regarding its current real-time reliability. Adjustments can lag or react to anomalies.
• It is a lagging indicator: The chart bases its predictions on historical data, meaning it cannot anticipate sudden market changes.
• Limited macroeconomic and fundamental analysis: The Rainbow Chart is purely a technical analysis tool and does not account for macroeconomic factors, fundamental shifts in the asset, or changes like hard forks or protocol upgrades.

Bitcoin Rainbow Chart 2024: What to Expect?

The potential trajectory of Bitcoin may play out of several technical and macroeconomic factors:

• Undervalued Territory: The Bitcoin Rainbow Chart currently signals that Bitcoin is in undervalued territory, as the price is trending in the lower bands of the chart. This suggests a potential buying opportunity based on long-term historical trends.
• Fed’s Interest Rate Cutting Cycle: Since September 2024, the Federal Reserve began cutting interest rates, which has historically benefited risk assets, including cryptocurrencies. This rate reduction has led to significant rallies in digital assets as liquidity flows back into higher-risk markets.
• Bitcoin Halving in April 2024: Bitcoin’s latest halving occurred in April 2024, reducing the block reward and slowing the rate of new Bitcoin entering circulation. Historically, Bitcoin’s price tends to rise in the years following a halving event, and many investors are anticipating a similar pattern in the coming cycles.

If macroeconomic factors such as interest rates and inflation continue to improve, the environment could provide a strong foundation for the Bitcoin Rainbow Chart to play out. This could lead to price gains in line with previous post-halving cycles, potentially pushing Bitcoin toward the upper bands of the chart.

Closing Thoughts

The Bitcoin Rainbow Chart is a simple yet powerful tool for visualizing Bitcoin’s long-term price trends. Constructed using logarithmic regression and colored bands to reflect market sentiment, it has evolved through years of recalibration to stay relevant to Bitcoin’s price movements.

When used correctly, the chart provides insights into potential buying and selling opportunities, making it a helpful tool for long-term traders. However, its reliability depends on its application—while effective over more extended periods, it’s speculative in the short term.

Like any model, the Rainbow Chart comes with risks and limitations. It is subjective, relies on historical data, and doesn’t account for real-time macroeconomic changes or short-term volatility. Additionally, frequent recalibrations can introduce uncertainty about its present accuracy.

Finally, while the chart can be a helpful guide, it’s crucial to understand its mechanics. By doing so, you can become a more self-reliant trader, less dependent on any single tool, and more confident in your decision-making. Understanding the why behind the chart’s predictions will improve your technical skills and help you find unique market signals many traders miss out on.