The Bitcoin Rainbow Chart uses the colors of the rainbow to help you understand whether BTC is overpriced/underpriced based on historical trends.
The Bitcoin Rainbow Chart uses a logarithmic regression curve that takes into account years worth of historical data. The chart is overlaid with colors of the rainbow to give a simple visual guide on how Bitcoin is performing relative to its history.
The Bitcoin Rainbow chart uses past performance to forecast different price outcomes for BTC.
The bottom of the rainbow represents the 1st percentile outcomes (the most pessimistic forecast for Bitcoin based on previous performance). If the current price of BTC is closest to the 1st percentile outcome, it may be a sign that BTC is undervalued.
The top of the rainbow represents 99th percentile outcomes (the most optimistic forecast for Bitcoin growth based on previous performance). If the current price of Bitcoin is closest to the 99th percentile outcome, it may be a sign that BTC is overvalued!
It’s important to remember that Bitcoin — like other cryptocurrencies — is highly volatile and goes through cycles.
In the peak of the bull run, Bitcoin’s price climbs to all-time highs! At the end of a bull run, Bitcoin’s price crashes.
Many traders wish to ‘time’ each cycle — in other words, buy BTC at the cheapest possible price and sell at the highest possible price.
The Bitcoin Rainbow Chart is a tool to help you better understand where the market currently stands and make better trading decisions.
While the Bitcoin Rainbow Chart can be a great tool, it shouldn’t be the only data point you should use when you decide to buy/sell BTC.
Remember, the Bitcoin Rainbow Chart is based on historical data.
If Bitcoin is near the top of the rainbow, it means that BTC may be considered ‘overvalued’. However, it’s also possible that demand for Bitcoin may have grown to a historically unprecedented level.
