## How to Interpret the Colorful Bitcoin Chart for Understanding Market Cycles

The visualization tool known as the colorful Bitcoin chart or rainbow chart has become an integral part of crypto analysts' toolkit. Currently, Bitcoin is trading at $87.27K, down 1.05% over the past 24 hours. This chart helps traders navigate long-term price movements of the asset through a color-coded system of various price ranges.

### Origin and Evolution of the Tool

The first version of the rainbow chart appeared in 2014 thanks to Reddit user "azop." Initially, it was a simple construction with colored stripes on a logarithmic scale. A significant improvement occurred in 2019 when community member Rohmeo introduced an enhanced version — the Rainbow Bitcoin Chart V2. This modification gave the tool its distinctive appearance and refined the mathematical basis of the color coding. Today, various platforms, including BlockchainCenter and TradingView, provide access to updated versions of this analytical tool.

### How the Colorful Chart Works and Color Zones

The core of the rainbow chart is a logarithmic regression curve that smooths Bitcoin's volatility and allows viewing long-term trends in price development. The chart is divided into nine color ranges, each symbolizing a specific market condition:

**Lower Bound (Undervaluation Signs):**
- The darkest blue zone indicates extreme price decline
- Light blue areas signal significant undervaluation
- Green ranges demonstrate moderate undervaluation
- Lime green color indicates mild undervaluation of the asset

**Mid and Upper Levels (Overvaluation):**
- Yellow range reflects fair valuation
- Orange zones begin to indicate possible overheating
- Light red stripes show signs of a bubble
- Dark red areas demonstrate clear overbought conditions
- The darkest red color indicates extreme overvaluation levels

### Practical Application of Analysis in Trading

To effectively use the rainbow chart for predicting BTC movements, the following approach is recommended:

First, determine the current Bitcoin price level by matching it with the color range. Hover the cursor over the current price point on the tool and note the corresponding color. This provides an initial understanding of the current market state relative to historical patterns.

Interpreting color signals requires the following analysis: cool tones (blue and green spectrum) are traditionally associated with undervaluation periods, when favorable entry points for long-term positions are formed. Warm tones (orange and red spectrum) serve as warnings of possible overbought conditions and may signal the advisability of taking profits.

For deeper analysis, it is useful to compare current prices with historical cycles. Study how quotes behaved during previous periods when in the same color range. Recognizing these patterns helps better forecast likely development scenarios.

Key rule: never rely on a single tool. Combine the colorful chart with technical indicators (RSI, MACD, volume), as well as the Stock-to-Flow model to obtain a comprehensive view of price prospects.

### Relationship Between Halving Events and Chart Color Zones

Bitcoin halving events, occurring every four years, have a significant impact on long-term prices. These events cut mining rewards in half, limiting new coin supply and creating scarcity. Historical data analysis shows an interesting pattern: around halving periods, Bitcoin's price often resides in the lower rainbow chart ranges, indicating possible undervaluation of the asset.

After halving completion, a rising movement is often observed during the subsequent cycle. As demand increases and supply tightens, the price migrates into higher color zones on the chart. This upward movement reflects a transition from undervaluation to a period of rising quotes. However, it is important to remember that halving does not guarantee a specific outcome but provides historical context for analysis.

### Advantages and Disadvantages of Using the Tool

**Positive Aspects:**

The visual clarity of information allows beginners to instantly grasp the overall market sentiment without complex calculations. The long-term perspective of the rainbow chart covers the entire history of Bitcoin quotes, providing broad context for price evolution. The accessibility and intuitive design of the tool make it attractive for novice traders. When combined with other technical tools, analysis becomes more structured and balanced. The educational value helps market participants learn patterns and Bitcoin behavior across different development phases.

**Limiting Factors:**

The retrospective nature of the model means it is based solely on past data, not guaranteeing future predictions. The simplified color coding system does not cover all factors influencing the price (regulatory decisions, geopolitical events, innovations). The subjectivity of the boundaries between color stripes can lead to different interpretations by various analysts. The tool is less effective for short-term trading, as it is designed for long-term analysis. The evolution of the Bitcoin market may require regular adjustments to the model to maintain relevance.

### Application in Portfolio Management Strategies

Blue and green zones on the rainbow chart are traditionally viewed as accumulation periods when the market shows signs of undervaluation. These are times to consider increasing positions for long-term holding. The yellow zone signifies fair valuation and market balance, where maintaining existing positions is advisable. Orange and red ranges indicate growing enthusiasm, possible overheating, and the need for caution or profit-taking.

Each color zone serves as a guide for trading decisions. However, the chart should be seen as a guideline, not an exact forecast. Historical trends reflected in the tool do not guarantee future results.

### Final Recommendations

The Bitcoin rainbow chart is an effective visual tool for understanding long-term price trends. It provides a clear display of market sentiment through a system of color ranges and serves as an auxiliary decision-making aid. However, no analytical tool is a universal solution. The optimal approach is to use the colorful chart in conjunction with other technical indicators, volume analysis, and fundamental factors. Be attentive to changing market conditions and be prepared to adjust your strategy based on new information. Such a comprehensive approach to analysis will help you navigate the cyclical nature of the crypto market more confidently.