It’s no secret that the cryptocurrency market is volatile. As the price of Bitcoin tends to rise and fall dramatically, investors are always looking for a tool to streamline making efficient investment choices.
The Bitcoin Rainbow Chart is one of many tools invented to create an easy visual guide to investing in this cryptocurrency. As price of Bitcoin rises and falls, the rainbow chart is designed to help investors determine the right times to buy and sell their tokens. It also allows you to compare the current price of Bitcoin with historical trends.
Let’s take a closer look at the Bitcoin Rainbow Chart and see how you can efficiently build your investment portfolio.
Key learning points
- The Bitcoin Rainbow Chart reflects a logarithmic growth curve.
- The chart uses different colors to highlight good times to buy or sell Bitcoin.
- While this is a helpful view, investors should look beyond the Bitcoin Rainbow Chart when making investment decisions.
What is a Bitcoin Rainbow Chart?
The Bitcoin Rainbow Chart is a tool investors use to assess the current value of the cryptocurrency in relation to the big picture. Within the chart, you will see a rainbow of colors that reflect a logarithmic growth curve, which investors use as a mathematical tool to predict Bitcoin’s possible future price.
If you look at the rainbow chart, you can also see Bitcoin’s price over time. Notably, the chart’s designers didn’t want daily price fluctuations to distort the data. Instead, the chart ignores the noise of market movements throughout the day to focus on Bitcoin’s overarching price trends.
Why is Bitcoin so volatile?
Bitcoins are produced through a process called mining. Miners are nodes in Bitcoin’s network that solve complex math problems to earn the next “block” of Bitcoins. Mining has a dual purpose: store new Bitcoins that come into circulation and check the blockchain to ensure that all transactions are valid and that no double spending occurs.
Because Bitcoin mining requires robust hardware and a lot of energy, it is costly, slow, and only sometimes financially rewarding. Still, it has attracted a lot of interest in recent years due to the decentralized nature of the Bitcoin blockchain and its status as a type of modern precious metal.
Unlike the gold standard or fiat currency, Bitcoin is a new and largely untested currency. It is not used in most people’s daily lives and has yet to be accepted as a legitimate form of payment by most retailers and sellers.
Bitcoin is volatile because its price depends on supply and demand. The price fluctuates depending on how many Bitcoins are in circulation, how much people are willing to pay for the tokens, and how close the currency is to the 21 million Bitcoin limit.
This limit was purposely set by Bitcoin’s inventor so that miners could not keep minting coins for so long that they caused wild price swings. Hype for Bitcoin in the media or negative press can also lead to volatile Bitcoin prices. For example, some experts argued that the recent collapse of Silicon Valley Bank has led to increased interest in cryptocurrency products, driving up the price of Bitcoin.
What happened to the price of Bitcoin in 2022?
2022 was a particularly volatile year for economies worldwide. Inflation in the United States led the Federal Reserve to push through a series of aggressive rate hikes, making borrowing more expensive to reduce discretionary spending. As rates rose, they hurt corporate profits and many tech companies laid off thousands of workers.
The Russian invasion of Ukraine last year also led to widespread economic uncertainty. Energy prices skyrocketed, especially in Europe, as access to Russian energy resources became restricted.
Bitcoin saw its price fall from over $60,000 at the end of 2021 to under $20,000 at the end of 2022. The collapse of FTX in November 2022 was a particularly low point for Bitcoin, as investor confidence in the speculative asset seemed low.
However, the price of Bitcoin has since recovered and will see positive growth in 2023. As inflation and interest rate hikes ease, consumers are starting to spend more and feel more comfortable putting money into something as risky as Bitcoin.
Who created the Bitcoin Rainbow Chart?
The Bitcoin Rainbow Chart came onto the scene when a Reddit user, Azop, introduced the chart to track Bitcoin’s price. The chart is designed to predict future market trends without the distraction of daily market volatility.
How does the graph work?
The graph overlaps the price of Bitcoin on a rainbow. Since the logarithmic growth curve is meant to predict the future price of Bitcoin, different colors are meant to highlight the main opportunities for buying or selling it.
In general, investors use this chart as a long-term valuation tool. But the predictions made within the rainbow map are not necessarily accurate. It’s just a way to quickly assess Bitcoin’s current price levels.
At the end of every 24 hours, the chart is updated with the daily closing price. This allows you to filter the fluctuations within one day in order to better assess the bigger picture.
A guide to the Bitcoin Rainbow Chart
The appeal of the rainbow chart is that it seems to provide clear advice on what actions to take in your portfolio, at least according to the chart’s measurements. Here’s an overview of what the colors mean:
- Red: When the price of Bitcoin is in the red, the Bitcoin Rainbow Chart indicates a “maximum bubble area”. This makes it a good time to sell Bitcoin, but not to buy it.
- Orange: When the price of Bitcoin is in the orange, it is in the “FOMO intensifying” phase, which means that the price is relatively high. This makes it a wise time to sell Bitcoin, but not to buy it.
- Yellow: When the price of Bitcoin is in the yellow, the Bitcoin Rainbow Chart indicates that the price is neither too high nor too low. Therefore, buying or selling the currency has little advantage.
- Light green: When the price of Bitcoin is light green, the Bitcoin Rainbow Chart indicates that the price is on the low side. With that, there’s growth potential, making it a pretty good time to buy but not sell.
- Vegetable: When the price of Bitcoin is in the green, the Bitcoin Rainbow Chart indicates that the price is on the low side. Since the potential is undervalued, there is some potential room for growth, making it a pretty good time to buy but not sell.
- Blue green: When the price of Bitcoin is in the blue-green, the Bitcoin Rainbow Chart indicates that the price is on the low side. With that, there’s a lot of growth potential, making it a good time to stock up.
- Indigo: An indigo-level price is about as good as it gets, known as a fire sale, making it a perfect time to buy Bitcoin.
By following the rainbow chart, it’s easy to see where Bitcoin’s price is based on its color.
Advantages and Disadvantages of the Bitcoin Rainbow Chart
As with all investment tools, there are pros and cons to using the rainbow chart.
Let’s start with the positives:
- Fairly good track record: Since the chart’s launch in 2014, it has remained relatively accurate.
- Easy to use: It’s easy to check in with the rainbow chart before buying or selling Bitcoin.
Now for the cons:
- Not an infallible result: While the chart is accurate so far, that doesn’t mean it will always be a good estimate of Bitcoin’s price direction.
- Does not look at the daily fluctuations: If you want to buy and sell Bitcoin all day long, this chart won’t help you much.
Should you rely on the rainbow map?
The Bitcoin Rainbow Chart is a useful visual for quickly assessing where the price of Bitcoin is. But long-term research has yet to support the chart. When dealing with highly volatile cryptocurrencies, things can change quickly.
Since past performance does not necessarily indicate future results, relying on the rainbow chart will not always result in blockbuster investment returns. Relying solely on this chart can mislead your investment decisions if Bitcoin’s price behaves unexpectedly.
The rainbow chart can be a good place to make investment decisions. But it’s important to follow up your initial discovery with other information about the state of the Bitcoin market before moving forward with any investment decision.
How to invest in cryptocurrency
Most successful cryptocurrency investors regularly monitor changes in the market to guide their decisions. Since the cryptocurrency market is highly volatile, constant monitoring seems to be a path to success.
However, only a few investors interested in the cryptocurrency have the time or inclination to consistently monitor the markets. The good news is that with the proliferation of artificial intelligence, it is possible to find investment software that protects your money from volatility and price fluctuations.
At the same time, nothing in the crypto space is guaranteed, and you should not invest money that you need to survive. Multiple established crypto exchanges collapsed in 2022. Investors should be wary of any cryptocurrency that makes promises to investors that seem too good to be true.
It comes down to
The Bitcoin Rainbow Chart is a tool available to cryptocurrency investors. If you are trying to determine the right time to buy or sell Bitcoin, this tool can give you a quick look at the situation. However, it should not be the only tool you use to determine the right time to buy or sell Bitcoin.