Bitcoin Rainbow Chart: Long-Term Price Band Indicator

What is the Bitcoin Rainbow Chart?

The Bitcoin Rainbow Chart is a long-term valuation tool that overlays color-coded price bands on top of Bitcoin's logarithmic growth curve. Originally created by the Bitcoin community, this chart divides Bitcoin's historical price action into nine distinct color bands ranging from "Fire Sale" (deep blue) to "Maximum Bubble Territory" (dark red).

Each band represents a different valuation zone based on where the current price sits relative to Bitcoin's long-term logarithmic regression trend. The chart has been a popular educational tool since 2014, helping new and experienced participants visualize where Bitcoin currently sits in its broader market cycle.

Unlike short-term technical indicators that focus on days or weeks, the Rainbow Chart takes a multi-year perspective. It smooths out short-term volatility and asks a simple question: is Bitcoin currently cheap, fairly valued, or expensive relative to its historical growth trend?

How Logarithmic Regression Works

Bitcoin's price history does not follow a linear path. Instead, it follows a logarithmic growth curve: rapid early gains that gradually flatten over time. A $1 move from $1 to $2 represents 100% growth, while a $1 move from $100,000 to $100,001 is essentially zero in percentage terms.

Logarithmic regression fits a curve to Bitcoin's historical price data on a log scale. The resulting trendline captures the asset's long-term trajectory while filtering out the extreme swings in either direction. The Rainbow Chart then creates parallel bands above and below this centerline, each representing a standard deviation from the mean.

This approach works because Bitcoin's adoption curve resembles other technology adoption S-curves: explosive early growth that gradually moderates as the market matures. Each cycle tends to produce lower percentage gains at the peaks and higher percentage gains at the bottoms, which is exactly what a logarithmic model would predict.

The 9 Color Bands Explained

The Rainbow Chart uses nine distinct bands, each with a color and a label that summarizes the market sentiment or valuation at that level:

The bands shift upward over time as the logarithmic curve naturally increases. What counted as "Maximum Bubble Territory" in 2017 (around $20,000) now falls within the lower bands. This upward drift reflects Bitcoin's growing maturity and broader adoption.

Historical Accuracy and Observations

Looking at Bitcoin's full price history, the Rainbow Chart has captured the major cycle tops and bottoms with reasonable accuracy:

• The 2013 peak near $1,100 briefly touched the red and dark red bands before a prolonged bear market
• The 2017 peak near $20,000 reached the dark red zone, followed by an 84% drawdown
• The 2021 peak near $69,000 entered the orange and yellow bands but never reached the darkest red zone
• The 2022 bottom near $16,000 dropped into the blue and dark blue bands before recovering
• Each successive cycle has seen the price spend more time in the middle bands, suggesting market maturation

An important observation: as Bitcoin matures, the extreme bands are reached less frequently. The 2021 cycle never reached the "Maximum Bubble Territory" band that earlier cycles did. This could suggest that as adoption grows and the market becomes more efficient, the wild oscillations between extreme bands may continue to narrow.

Limitations of the Rainbow Chart

While the Rainbow Chart is a useful visualization tool, it comes with important limitations that every user should understand:

• The chart is based on curve-fitting historical data. There is no guarantee the logarithmic growth trend will continue indefinitely
• The band boundaries are somewhat arbitrary. Different implementations use slightly different regression parameters
• It does not account for fundamental changes in Bitcoin's adoption, regulation, or competitive landscape
• Past cycle patterns do not predict future cycles. Each halving cycle has been different
• The chart says nothing about short-term price direction. Bitcoin can remain in any band for months or years
• If Bitcoin's growth model shifts from logarithmic to linear or stagnates, the entire chart framework breaks down

Important: The Bitcoin Rainbow Chart is an educational tool, not a trading signal. It should never be used as the sole basis for investment decisions. Always consider multiple data points, understand your risk tolerance, and consult a qualified financial advisor before making investment decisions.

How to Use the Rainbow Chart

The most constructive way to use the Rainbow Chart is as a big-picture context tool. Rather than trying to time exact tops or bottoms, use it to answer a general question: where are we in the cycle? Here are some practical approaches:

• Check the current band position before making large allocation decisions to understand the broader context
• Use it alongside dollar-cost averaging (DCA) strategies: increase your regular purchases when the chart shows lower bands and reduce them in higher bands
• Compare the current cycle position against previous cycles to set expectations for potential upside or downside
• Combine it with on-chain metrics (like MVRV ratio, SOPR, or exchange flows) for a more complete picture

Frequently Asked Questions

Is the Bitcoin Rainbow Chart a reliable price predictor?

No. The Rainbow Chart is a visualization tool, not a prediction model. It shows where the current price sits relative to Bitcoin's historical logarithmic growth trend, but it cannot predict where the price will go next. It is best used for general cycle context rather than specific price targets.

Who created the Bitcoin Rainbow Chart?

The original Rainbow Chart concept emerged from the Bitcoin community around 2014. It was popularized by the website "Bitcoin Rainbow Chart" and has since been adapted and improved by many analysts. The underlying logarithmic regression model was first applied to Bitcoin by multiple researchers independently.

Why does the chart use a logarithmic scale instead of linear?

A logarithmic scale is essential because Bitcoin's price has increased by several orders of magnitude (from fractions of a cent to tens of thousands of dollars). On a linear scale, early price history would be invisible. The log scale treats percentage changes equally, making a move from $1 to $10 visually equivalent to a move from $10,000 to $100,000.

What band is Bitcoin in right now?

The current band position depends on today's price relative to the logarithmic trend. Check the interactive chart above for an approximate current position. Keep in mind that the band boundaries shift over time as the regression model naturally trends upward.

Can the Rainbow Chart break or become invalid?

Yes. If Bitcoin experiences a fundamental shift in its growth model (for example, prolonged stagnation, a move to linear growth, or a permanent decline), the logarithmic regression underlying the chart would no longer apply. The chart is only valid as long as Bitcoin continues to follow a broadly logarithmic growth pattern.

How do the price ranges for each band change over time?

The band ranges increase over time because the logarithmic regression curve is always trending upward. What was the "Hold" band in 2020 might now be in the "Fire Sale" range. The values shown in this tool are approximations for the current year and will need updating as time progresses.

Should I sell when the chart shows red bands?

The chart labels like "Sell. Seriously." are colloquial names from the community, not financial advice. Historically, red band entries have been followed by significant corrections, but the timing and magnitude vary widely. Any sell decision should factor in your personal financial situation, tax implications, and investment goals.

How does the Rainbow Chart compare to the stock-to-flow model?

Both models attempt to project Bitcoin's long-term value, but they use different methodologies. The stock-to-flow model focuses on Bitcoin's scarcity (supply reduction from halvings), while the Rainbow Chart uses pure price regression. The stock-to-flow model has faced criticism for its predictions diverging from reality in recent cycles. The Rainbow Chart, being less prescriptive about exact targets, has been somewhat more resilient as a general framework.

This tool is for educational purposes only and does not constitute financial advice. Bitcoin is a highly volatile asset. Past performance does not guarantee future results. Always do your own research and consult a qualified financial advisor before making investment decisions.