Topics Strategies
Bybit Learn
Bybit Learn
Beginner
May 19, 2022

Bitcoin Rainbow Chart: Logarithmic Regression and BTC Price Movements

Knowing when to buy or sell cryptocurrency is always going to be tricky and requires ample research into recent trends, as well as the state of your preferred currency. Looking at past pricing trends can be helpful when making future investment decisions. In 2014, a crypto rainbow chart was created for Bitcoin to highlight the evolution of Bitcoin’s price. This chart has been used by many BTC investors to predict when the market may enter bear or bull territory. The following guide takes an in-depth look at the Bitcoin rainbow chart and when you should consider using it.

What Is the Bitcoin Rainbow Chart?

The Bitcoin rainbow chart is a basic logarithmic regression chart that denotes how the Bitcoin price has evolved over time. This crypto rainbow chart uses colored bands to indicate when it may be time to buy, sell or hold.

The first component of the Bitcoin rainbow chart was created in 2014 by Reddit user azop. At this stage, the rainbow color chart was placed online to show the Bitcoin trending price. This chart was only designed to be a fun and interesting graphic that other Bitcoin investors might enjoy taking a look at. Because of how colorful and surprisingly accurate the chart turned out to be, it was given the name "Bitcoin rainbow chart."

Later that year, a logistic model known as logarithmic regression was introduced by a BitcoinTalk user named trolololo. This statistical model indicates a situation where decay or growth accelerates rapidly at the beginning before slowing down over time, which is a trend that many cryptocurrencies adhere to. Once the algorithmic regression was applied to the BTC logarithmic chart, the rainbow had a curve to it. At the beginning of the chart, the curve rose sharply before beginning to eventually level out.

Even though the Bitcoin rainbow chart isn't meant to be predictive, it has remained relatively accurate since it was created. The rainbow consists of nine separate bands of colors with blue on the low end and red on the high end. When the Bitcoin price decreases, the line starts moving toward the blue color band. An increase in pricing pushes it toward the red color band. Despite using nine bands of different colors, the chart initially displayed three captions that read:

  • Blue = Buy!

  • Yellow = Average

  • Red = Sell!

A Bitcoin enthusiast named Über Holger eventually improved this crypto rainbow chart by adding captions to each band for a more precise understanding of when to buy, sell or hold.

Even though the BTC logarithmic chart has always been popular among Bitcoin traders, this indicator has increased considerably in popularity over the past six months or so, which is when BTC prices began nosediving and essentially halved in value. This price movement lines up with past Bitcoin trends. In 2013, Bitcoin reached a high value of $1,237 before dropping sharply to around $112 over the next few months.

Nearly four years later, Bitcoin reached a peak of $19,345 toward the end of 2017. BTC value would drop to just $7,500 over the next few months. Another four years later, Bitcoin reached a value of just under $70,000 at the end of 2021. Its value almost immediately dropped and now sits at around $30,000.

How to Use the Bitcoin Rainbow Chart

Source: blockchaincenter.net

As mentioned above, the Bitcoin rainbow chart consists of nine distinct bands with different colors. These bands are put together to create a rainbow. In this specific crypto rainbow chart, the nine bands are referred to as:

  • Blue = Basically a fire sale

  • Bluish-green = Buy!

  • Green = Accumulate

  • Light green = Still cheap

  • Yellow = Hold!

  • Light orange = Is this a bubble?

  • Orange = FOMO intensifies

  • Red = Sell!

  • Dark red = Maximum bubble territory

Timing with the Bitcoin Rainbow Chart

Since a logarithmic regression model was added to the Bitcoin rainbow chart, traders can use it to better understand crypto price movements and what they mean. This chart is based on a natural logarithmic curve that displays various hues for the purpose of helping traders know how to time entries and exits.

The horizontal view of this crypto rainbow chart chart shows the date, while the vertical view highlights the Bitcoin price. Even though the logarithmic regression model was added to the BTC logarithmic chart in 2014, it has been correct up to this point.

To understand how the logarithmic regression model works with this chart, you should know how the price has changed over the years. When the rainbow was at its lowest point in 2012, the red band indicated a BTC price of $39.50. In comparison, the blue band was at $2.18. Cryptocurrencies tend to increase sharply in value in a short period of time, which is what happened with Bitcoin.

Because of how the logarithmic regression model indicated a sharp increase toward the beginning before an eventual flattening of the curve, the red band was already at a price of $620 by the beginning of 2014. By 2021, this band indicated a value of $114,000. Bitcoin was subsequently priced at $36,000, which placed it close to the center of the Bitcoin rainbow chart.

Pros and Cons of the Bitcoin Rainbow Chart

The main benefits of this crypto rainbow chart are as follows:

  • The chart has remained accurate during its eight years of existence.

  • The logarithmic regression model is fairly useful for many different types of investments in somewhat volatile assets.

  • It's possible to make relatively informed buy or sell decisions with this chart.

  • The chart is easy to understand for any investor.

The various issues associated with using this chart to make investment decisions include:

  • The chart only shows long-term price movements, and doesn't have any kind of scientific basis.

  • Even though the Bitcoin rainbow chart has largely been correct throughout the history of BTC, it can eventually be wrong without any forewarning.

  • Some traders make the mistake of relying too heavily on this crypto rainbow chart.

Is the Bitcoin Rainbow Chart Reliable?

If you want a foolproof way to make investment decisions on buying or selling Bitcoin, the truth is that doing so is practically impossible. While the Bitcoin rainbow chart has proven to be an effective measurement of market changes and volatility since it was created in 2014, it's not an indicator of future Bitcoin prices.

While crypto rainbow charts like this one shouldn't be the only thing you use to inform your future investment decisions, the info you obtain from looking at long-term price movements can help you gain a better understanding of the volatility for a specific crypto.

The exceedingly high price of Bitcoin means that any fluctuations are going to appear substantial. A 1% drop in Bitcoin’s current price would amount to a reduction of $300. This specific chart shows that the BTC price enters the bull market peak approximately every 3–4 years. These trends may indicate the same for the future, which could allow you to make predictions on BTC price movements.

Combining Indicators for Improved Accuracy

To understand how this logarithmic crypto rainbow chart can be helpful when you're developing an investment strategy, it’s best to compare it with other long-term trading indicators. One such tool that crypto traders commonly use is the relative strength index (RSI) indicator. 

RSI allows traders to identify when an asset’s price isn't close to its "real" value, which gives traders the opportunity to make investment decisions before the market responds accordingly. The RSI indicator displays a value ranging from 0–100.

This value is shown on a chart via a wave pattern. If the RSI ever rises above 70, this indicates that Bitcoin is being bought too heavily, which means that it's a good time to trade before the price drops. The indicator you use largely depends on what type of trader/investor you are. If you want to attempt to perfectly time the market, both the RSI indicator and the BTC logarithmic chart may give you the data you need to "predict" price trends.

The Bottom Line

Overall, the Bitcoin rainbow chart or any other display of logarithmic regression can only be helpful up to a certain point. Understanding the long-term trading indicators and price trends associated with Bitcoin and other cryptocurrencies will invariably make you a more knowledgeable investor. However, past price movements don't necessarily correlate with future performance. If you decide to use the Bitcoin crypto rainbow chart, make sure that it isn't the only tool you use when investing.