Buy and sell cryptocurrencies At the right time, it is never easy. This requires extensive study of recent trends and the current status of your chosen currency. When deciding whether to invest in the future, it is useful to look at past price trends.
The Bitcoin Rainbow Chart is a new and reliable way to visualize the historical price trend of Bitcoin. With a little exaggeration, it can be said that the Bitcoin rainbow chart gives an impression without distortion and error of the Bitcoin price trend. This index uses a statistical model that has removed short-term daily fluctuations from its calculations. Bitcoin rainbow chart is a useful indicator in Bitcoin analysis. This indicator is a good tool for traders because it shows historical price movements with colored bars. The rainbow chart concept is also applicable to other crypto assets including Ethereum. However, Bitcoin Rainbow is more popular because it is the oldest cryptocurrency in the world and more price reference data is available for it. Next, we will discuss what the Bitcoin Rainbow Chart is and how we can use it.
Logarithmic regression, the underpinning of Bitcoin’s rainbow
Rainbow takes into account previous and current prices to draw the chart. Rainbow chart every 24 hours based on close daily candle It will be updated and always available for free. But unlike other trading charts, the Bitcoin Rainbow Chart puts the historical price pattern on a logarithmic chart, which reduces distortion and misinformation. Exponential or exponential growth is a graph that starts slowly and peaks sharply after a certain period. Logarithmic growth is the opposite of this trend. A logarithmic curve begins with rapid growth and continues with a gentle slope over time.
A logarithmic regression Statistical modeling technique It is used to evaluate a rapidly growing or declining process whose intensity of change gradually slows down over time. Simply put, it’s a way to analyze and create relationships that a standard linear trend can’t show. With the huge initial growth that the Bitcoin price had in the beginning, its entire elapsed time cannot be represented in a linear graph. In this situation, it seems the need for a logarithmic regression is necessary and mandatory. Logarithmic regression modeling is a statistical modeling strategy that makes Bitcoin Rainbow a reliable tool for measuring long-term BTC price movements.
History of the Bitcoin Rainbow
Bitcoin was created in 2009 amid concerns over economic volatility. While most technical analysis tools such as moving averages, Bollinger Bands, etc. were used to determine buy and sell levels, price volatility remained challenging. Challenges like these showed the need for a scientific instrument that could provide a view of the future price of Bitcoin. The Bitcoin Rainbow Chart was one such tool that helped traders plan their long-term trades accurately.
The BTC rainbow chart was the brainchild of Azop (a Reddit user) who formulated it in 2014. This chart was originally created as a fun chart, but it quickly gained attention. In the initial model published by Azop, it was all about color coding the price change, as part of a line chart. After the chart became popular, in 2014 a user Bitcointalk Nicknamed Trolololo, he combined that graph with logarithmic regression and gave it a neat shape and purpose. The third person who influenced the structure of this chart was Uber Holger, the CEO of Holger. He carefully adjusted and developed the chart and finally uploaded the same on Blockchaincenter.
Understanding the Bitcoin Rainbow Chart
The Bitcoin Rainbow Chart is a proven and mathematically valid tool that uses rainbow-shaped colored bars to determine key price trend reversal points. The rainbow consists of nine distinct colored bands, with blue being the lowest band and dark red being the highest band. Each band means something to investors.
Here are all the elements of the rainbow chart and what they mean to you as an investor:
- dark red: Extreme FOMO, the price bubble is bursting.
- Red: Maximum shopping area. It is a sell signal and profit saving is recommended.
- dark orange: FOMO has begun and is growing rapidly.
- Bright orange: Balanced territory and impasse of buyer and seller.
- yellow: Realm of Bitcoin Holders.
- light green: The price of Bitcoin is still in the bargain buy zone or has started to decline.
- Green: Supply and accumulation area that is suitable for investment.
- light blue: Clear shopping area.
- Blue: Indigo is the area of maximum bearishness and supply.
Of course, none of these cases should be considered as a definite result for investment. Rather, one should always do more research before proceeding.
Read and interpret the Bitcoin Rainbow Chart
The Bitcoin Rainbow Chart is very easy to read. As it uses historical price data, you can see each price trend since 2014 in a specific area of the rainbow chart. Right in the middle of the chart band, we have the central yellow area that serves as the starting point of the chart. Colored bands above and below the yellow band Deviation they say.
As BTC approaches the hotter red and orange zones, it approaches the overbought zone and investors consider prices in the bubble zone. When Bitcoin rests in these warmer zones for a while, investors will start saving profits. Selling in hotter areas like red and orange means that Bitcoin is above its fair value and in Price bubble zone It is traded.
For example: BTC price reached $67,492 on November 8, 2012 and the rainbow index in the region bright orange was located Bitcoin eventually saw a sharp decline over the next few months.
On the contrary, Bitcoin’s movement towards the cool green and blue colored bands indicates the sentiment of supply and accumulation. We can expect Bitcoin to be available for trading at low prices in these areas.
For example: BTC was in the blue zone during the 2020 crash when the price dropped to $5,000. According to the bitcoin rainbow chart of this area Hot sale It is very suitable for accumulation.
The rainbow plot of the logarithmic regression appears to be flattening over time. This shows that Bitcoin’s volatility seems to be narrowing over time. All this indicates a more mature price trend.
Rainbow applications of Bitcoin
A rainbow diagram can seem dumb at first. However, using it you can see exactly how much the price has fluctuated over time and how much it has changed from historical prices. Just as it takes sunshine (bull market) and rain (bear market) to make a rainbow, the Bitcoin rainbow can be used to track the overbought and oversold areas of the Bitcoin ecosystem. But determining the future price using a chart can be difficult because the value of Bitcoin is constantly fluctuating and changing rapidly. This makes it difficult to read the chart correctly and understand the actual price at that time. In order to better understand the value at each point, you should also use several other indicators.
With the help of this chart, you can see the total number of bitcoins traded in a certain period of time, which shows you the amount of liquidity in the market.
Note that if you are going to use the Bitcoin Rainbow Chart as is, you can get a broader picture by looking at the price and the color band that the price is currently in. In short, the rainbow diagram has the following uses:
- Forecasting the investment area and time.
- Determining the time of the price trend change along with the use of moving average indicators.
- Finding the profit saving zone, provided it is used alongside trend indicators.
- Determining potential maximum purchase areas.
- Predicting the potential point of accumulation of Bitcoin at the price floor.
Features of the Bitcoin Rainbow Indicator
The Bitcoin Rainbow Chart is a powerful tool. However, like any other specific indicator or chart, it has its pros and cons.
Advantages:
- It has been very accurate since its inception.
- It uses a valid statistical model based on logarithmic regression.
- It is useful in examining the long-term price period without noise.
- It takes the emotion and guesswork out of Bitcoin asset management.
- It is simple to understand even as an independent indicator.
Disadvantages:
- It is not suitable for measuring short-term price trends.
- The chart needs more time to fully mature.
- It is not a suitable tool for predicting the future price.
- It does not take market dynamics into account and as a technical analysis tool, it contrasts with fundamental analysis.
Bitcoin Rainbow Support Indicators
Although Bitcoin Rainbow is powerful on its own, it works even better when combined with the following indicators. In general, the Bitcoin Rainbow Indicator is effective in predicting long-term price movements. But if you pair the rainbow chart with other indicators, you have a medium to long term price forecasting tool.
Volume indicators
Neutral or so-called sideways trends are very common in the Bitcoin rainbow chart. In the long run, prices do not always rise or fall at a set point. Therefore, as an informed investor, you can pair the Bitcoin Rainbow chart with a volume indicator to determine trend reversals and even spot pullbacks.
The On-Balance volume indicator and the accum/dist indicator are the best volume tools to use alongside the Bitcoin Rainbow indicator.
Trend indicators
Trends can be helpful in fine-tuning long-term trading strategies. If you know where the future price movement is in the short term, you can use the rainbow price bands better. For example, if the price trend is in a neutral or so-called range channel, and the situation is the same for the Bitcoin rainbow chart, it is better to hold on! Because the price is likely to move or suffer in this neutral channel for a while. In an uptrend, where the price is reaching higher price ceilings in the short term, a sharp bullish move may occur in the color band where the Bitcoin Rainbow Indicator is located.
RSI (Relative Strength Index), Bollinger Bands and MACD are some of the more reliable trend indicators that move in line with the rainbow chart.
Sentimental indicators
Sentimental indicators measure market sentiment, short-term price volatility, market volume, search trends, and market dominance. The Bitcoin Rainbow Chart works well with these indicators, especially the Fear and Greed indicator.
Bitcoin Rainbow Chart vs. STF Index
Stock to flow is another reliable price forecasting indicator that differs from the rainbow chart in several key aspects. While the Rainbow Chart uses historical prices and logarithmic regression to determine the price index, the STF model takes into account the price and scarcity of Bitcoin. Simply put, the Bitcoin rainbow chart focuses on price, while the stock-to-flow chart focuses on scarcity.
The STF chart for Bitcoin is based on two main factors: the total supply of Bitcoin, which is 21 million BTC, and the mining rate per period.
Unlike the rainbow chart which follows a price model, STF takes into account the halving cycles of Bitcoin mining rewards. As the supply flow of Bitcoin decreases, the ratio of inventory to amount in circulation is expected to increase, thus increasing prices.
Is the rainbow chart reliable?
The rainbow chart has been accurate since its inception and to date, both during bear and bull phases, prices have not deviated from their respective bands. However, there is no guarantee that price changes in the past will correlate with performance changes in the future. Therefore, if you decide to use the Bitcoin Rainbow Chart, you should not consider it the only tool you use when making financial decisions. For verification, you can check the stock-to-flow stf model during each halving cycle to predict the price and see what zone the price was in at that time. The white horizontal lines are the bisection points. Note how much the price of Bitcoin has fallen during the halving cycles and how it has risen after the event.
Looking at Bitcoin’s behavior in the past, we can see that every time Bitcoin has halved, the price has risen above the dark red bar. However, at the last bitcoin halving on May 11, 2022, it stopped at the chart’s highest price in the dark orange bar. Since the next bitcoin halving is expected to happen in the middle of 2024, we should be cautious in predicting the future!
What is Bitcoin Rainbow Chart? Introduction of Bitcoin Rainbow for the first time on Wallex blog. appeared.
