The usefulness 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 need to be made. 

How the Bitcoin rainbow chart is made.

First, it should be mentioned that the graph shows the price trend of BTC from 2012 to the present on a logarithmic scale. 

2012 is the year of the first halving, and what happened to the price of Bitcoin in previous years is too anomalous to be taken into account in reasoning about long-term trends. 

The logarithmic scale serves precisely to give better visibility to percentage increases over 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 run 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 percentages, that is, showing over the long run the 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 not actually a real rainbow, but nine variable price ranges over time, growing in very easily identifiable arcs on a logarithmic scale. 

One must, however, keep in mind that these are totally arbitrary bands, with an equally arbitrary trend. 

Even though 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 lower two (blue and light blue), and the upper two (light red and dark red). 

Note that three times in Bitcoin’s history the price has gone beyond the outer bands of the rainbow graph. 

The anomalies 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 major 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 at the end of November, then fell and returned to the $1,000 mark between December 2013 and January 2014. 

In fact, it was quite evident even then that those prices were excessively high, given that in early 2013 the starting level was only $13. 

During the following bear market, and the subsequent speculative bubble of 2017, there were no anomalies, only a descent in the lower ranges and a rise in the higher ones. 

Actually, even in the 2018/2019 bear market, there were no anomalies because the second one was during the March 2020 financial market crash due to the onset of the pandemic. 

At that time the lowest band of the rainbow chart reached up to $5,000, while the price for a few days dropped to $4,000. 

However, this was a very brief anomaly, lasting only a few weeks. 

The third anomaly is ongoing. 

The lowest band on the rainbow chart of Bitcoin’s price currently goes as low as $19,000, although it is heading toward $20,000. 

As Bitcoin’s price in recent days has fallen below $19,000, the third anomaly of the rainbow chart is currently underway. 

Is the chart reliable?

At this point, the question to be asked is: Is this chart still reliable? That is, is the arbitrarily drawn curve of 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 merely describes the past one, making it well understood that Bitcoin’s price so far has followed an upward parabola made up of three fairly similar cycles. 

Bitcoin’s price cycles.

Taking the highs of each cycle as a reference, at the end of 2013, the price of Bitcoin rose above the highest band on the rainbow chart. At the end of 2017, on the other hand, it fell fully 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 optimally drawn up to 2020, while from 2021 onward it may have been drawn too optimistically. 

Taking as a reference the lows touched during the three post-bubble bear markets, the first in 2015 was perfectly inside the lowest, blue band, while the second in 2020 was below this band. However, it was then a black swan, due to the unpredictable onset of the pandemic. 

However, the lowest point of the current post-bubble bear market is also well below the lowest band of the rainbow chart, which reinforces the hypothesis that from 2021 onward the design of these bands is no longer accurate. 

The description of the bands

Each band has been assigned a descriptive name. 

Care must be taken, however, 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 named “accumulate,” the blue band “buy,” and the blue band “practically on sale.” Actually, these names were assigned only by analyzing the past behavior of the price, so they should by no means be taken as predictions for the future. 

The light orange band was called “is it bubbling?” and the orange “FOMO intensifies.” Even more explicit are the light red and dark red bands, called “sell” and “maximum bubble territory,” respectively. For example, in the course of 2021, the price of Bitcoin never got into the “sell” band, but then after entering the “FOMO” band it started to decline. 

One will notice how the arc at one point seems to stop, right in 2021/2022, and from that point onward it seems to proceed in a straight line, although since this is a logarithmic scale graph such a line is actually not straight. 

Conclusion 

This is therefore a graph to be taken with caution. 

It turns out to be very useful to easily understand, at a glance, Bitcoin’s price trend from 2012 to 2020, but it starts to creak right from 2021/2022. 

It also should not be taken as a predictive tool at all, because it is not based on any scientific basis useful for predicting the future trend of Bitcoin’s price.