Analyses
12
Sep
crypto market overview

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The Bitcoin rainbow chart

The Bitcoin rainbow chart is one of the oldest tools to evaluate Bitcoin’s price development. As the name suggests, the chart looks like a rainbow drawn over a long period of time. The Bitcoin rainbow chart is a logarithmic growth curve.

Who created the Bitcoin rainbow chart?

The Bitcoin rainbow chart was created in 2014 by a Reddit user named Azop. He created a graph to forecast Bitcoin’s price potential. Azop colored different bands of the chart to make it look like a rainbow. Hence, the name Bitcoin rainbow chart.

The chart reached a wider audience when a user named Trolololo presented the chart at the popular Bitcointalk discussion forum and applied it with logarithmic regression. The chart below is the original logarithmic regression curve by Trolololo that is used as the foundation of the rainbow chart.

bitcoin logarithmic chart

Bitcoin rainbow chart has been recently popularized by Eric Wall on Twitter. Wall is an experienced bitcoiner. He has often joked about how the rainbow chart is holding better than the famous Stock-To-Flow model, which many feel failed in late 2021.

It’s important to know that the Bitcoin rainbow chart was originally created as a joke or a meme. Nevertheless, it is yet to fail (Sep 2022). The price has dipped briefly below the lowest band but kept crawling higher according to the chart’s prediction.

How does the Bitcoin rainbow chart look like?

The Bitcoin rainbow chart is a logarithmic growth curve trying to predict the price development of Bitcoin. The bands of the chart have the colors of the rainbow. Each band describes the status of the Bitcoin price. Are we in bubble territory? Is it time to buy? These and everything in-between

Below is a live Bitcoin rainbow chart from lookintobitcoin.com.

bitcoin rainbow chart

The explanations of the color bands are as follows (from top to bottom):

  • Maximum bubble territory
  • Sell, Seriously, SELL!
  • FOMO intensifies
  • Is this a bubble?
  • HODL!
  • Still cheap
  • Accumulate
  • BUY!
  • Basically a Fire Sale

Bitcoin is deep in bear market territory at the time of writing this article (Sep 2022). The rainbow chart looked like failing in early September 2022 when many expected Bitcoin to crash to 15K dollars and lower. However, Bitcoin took a bounce from the bottom of the rainbow chart and climbed up.

If the rainbow chart is correct, this is a great time to buy bitcoin.

Can the rainbow chart predict Bitcoin’s price?

The Bitcoin rainbow chart has so far predicted Bitcoin’s price movement. It is the only popular prediction model that is still very much alive, not like the more famous Stock-To-Flow model. However, you have to take these predictions with a grain of salt. The rainbow chart was originally created for fun. It is just a theory that has so far been correct.

There are several problems with trying to predict the price development of Bitcoin. The two major ones are:

  1. Bitcoin is a developing asset class and technology
  2. Bitcoin has a strong correlation to the stock market

The first point makes it very difficult to model Bitcoin’s price. Bitcoin is only ~14 years old as a technology. It has been in the mainstream for five years. There has been an institutional presence for maybe three years. We simply lack quality information because the market has changed so much from what it was just five years ago.

Gold has been traded for 5000 years and stock markets have existed for several hundred years. There is lots of information available on these asset classes.

bitcoin and gold

Bitcoin is also technology, not a technology company. It reminds many of digital gold. Bitcoin pays no yield and it has no revenue or sales. It’s very difficult to model such an asset. Where is the demand coming from, really?

The second point is also very interesting. The past five years have proven that Bitcoin is highly correlated with the stock market. Each crash (2018, 2020, 2022) and each boom (2019, 2021) has seen both markets move up simultaneously. Even if Bitcoin’s fundamentals get better its price might still crash if the stock market enters a bear market.

The rainbow chart might end up being correct for another ten years or it might fail tomorrow. Only time will tell.

Will the rainbow chart of Bitcoin break one day?

The Bitcoin rainbow chart will probably break at some point in the future. However, the question is, how is this defined? The price of Bitcoin has been below the lowest band of the rainbow in March 2020 and September 2022. Generally speaking, the rainbow chart is still considered to be valid.

Bitcoin’s price would have to drop significantly below the lowest band and trend in the opposite direction for a longer period. Since the chart is originally created for fun, there are precise rules defined for how the validity will be measured.

The reason why the chart will probably break is that Bitcoin seems to have a higher correlation to the stock market than previously imagined. As we know, the stock market has booms and busts periodically. There will be a time in the future when the stock market crashes and takes crypto down with it – just like in 2022. It’s likely that one such crash would bring the price below the lowest band.

Who is Plan B Bitcoin?

Who is Plan B and how is he related to Bitcoin and the rainbow chart? Plan B is an experienced Dutch investor. He became famous in the spring of 2019 after releasing the Bitcoin Stock-To-Flow model. He has over 1.8 million followers on Twitter. Plan B has since made different versions of the model, but the idea remains the same.

Plan B tries to model Bitcoin’s price development based on the flow of new bitcoins. These are determined by the Bitcoin halvings, which take place roughly every four years. Bitcoin’s price has moved in clear “halving cycles” throughout its history. The model seemed to predict Bitcoin’s price development perfectly.

The tweet below has the S2F chart as of August 2022.

The Stock-To-Flow model was viral until the end of 2021. That is when Plan B had predicted Bitcoin to reach 100K and beyond. There was supposed to be a massive bull rally in December 2021 – just like four years earlier.

Instead, Bitcoin’s price peaked in early November and started crashing. The reason for the crash was the new monetary policy set by the Federal Reserve. This tightening policy impacted the stock market and brought cryptos down with it.

It’s been obvious since December 2021 that the Stock-To-Model of Bitcoin failed. But the Bitcoin rainbow chart is still up and running!

Photo by Kanchanara on Unsplash

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