If you are interested in predicting where the price of bitcoin is going over the long term, you have run into the bitcoin rainbow price chart, as it’s one of the most recognizable and talked about price prediction charts in the bitcoin space. It’s been “right” for a long time, despite wild fluctuations in bitcoin’s price over the past decade, and the logic behind its predictions just seems to make sense.
Though it doesn’t make specific price predictions for specific dates, it gives a range of possibilities that could play out, and offers a colorful scheme to signal whether you should buy or sell based on how hot the market is.
It’s simplicity is what makes it so meme-worthy. But is the bitcoin rainbow price chart actually worth your attention, or this something leave to the meme traders on Reddit? In this post, I dig into the history and logic behind the chart, and my opinions on whether or not it’s useful for the average bitcoiner.
Where Did Bitcoin Rainbow Chart Come From?
The Bitcoin Rainbow Chart is the results of work from a few different individuals. A user from Reddit tracked the price of bitcoin over time and put it on the colorful rainbow background to indicate when the price was overbought or oversold. Another user introduced the idea of logarithmic regression to predict the future price of bitcoin. From there, other people have tweaked and changed the chart to fit their modeling needs, but those are the two basic elements of what’s going on with the chart.
The colors indicate when bitcoin is cheap or expensive, as the price rises and falls. According to the chart, Bitcoin’s price goes up at an exponential rate that gradually decreases over time.
Is The Bitcoin Rainbow Chart Accurate?
Any backwards looking chart will always be ‘accurate’, because it it is simply a representation of data that already happened. The bitcoin rainbow chart is accurate because it shows you what the price was in the past. It doesn’t, and cannot predict what the price will be in the future.
For example, as you look at the current version of the chart, you see that there’s a oscillating pattern between the bottom and top of the chart, so you may expect the same to continue in the future. It should be easy to buy the bottom and sell the top, right?
But what what happens if the rainbow chart is accurate, but in a way that’s unexpected? For example, we could spend a full decade in the “BUY!” zone, then not reach “Bubble Territory” ever again.
If you were truly a believer in the rainbow chart and could hold onto your bitcoin that long, you could possibly make a humble 5x-10x return on your money over ten years, but the thing about charts like this, is that nobody truly believes them as set-in-stone accurate. By year 2 or 3, you’d be questioning your logic, and you’d probably sell. The powerful meme-magic of these charts lies in the possibility of predicting volatility so you can get rich buying low and selling high.
The rainbow chart is not an investment strategy. It’s a gambling strategy.
From the charts posted above, you wouldn’t know, but the in the original rainbow chart, the price actually diverged below the “fire sale” line for a short period. So if the price goes below the line, does it invalidate the model, or is it just a temporary blip?
How much of a blip, and how long of a blip do you need to experience in order to say that the chart is officially invalid? Well, the answer is that the chart continues to be retrofit, as you can see now that there’s a v2 of the rainbow chart which doesn’t show the dip past the colors. With charts like this, it’s accurate until it isn’t.
What happens to all these wonderful models if 10 billionaires decide to buy 1 billion dollars of bitcoin each and announce we bought it, we’re not ashamed of it, we’re gonna buy more. All your models are destroyed. Completely devastated.Michael Saylor
We saw the same thing happen with the S2F model, but the model was crushed so bad that most people eventually had to give up on retrofitting.
What is The Difference Between The Bitcoin Rainbow Chart And Stock-To-Flow?
There is another popular chart model called Stock to Flow (S2F), and along with the rainbow chart, they are the two most popular and recognizable ways to explain bitcoin’s previous price movements and extrapolate potential future price movements. They are directionally similar in that they both predict bitcoin gradually increasing over time, with periods of bull and bear markets. However, they are based on different models.
The rainbow chart is what is called logarithmic regression, and you can understand what that means from the meaning of each individual word. Logarithmic is a mathematical term that has to do with exponential numbers, meaning bitcoin’s price increases exponentially over time. Regression means that the timeline in which it increases will slow over time.
So you’d have a price that goes up hard and fast at first, then will continue to increase after that, but more slowly.
With Stock To Flow, the price increase are more uniform since they are based around the fixed timeline of the halvings. Price movements are centered around the halving dates, whereby the issuance of bitcoin is cut in half every 4 years. The “stock” of bitcoin will increase over time while the “flow” (issuance) will decrease.
As demand goes up, and the issuance rate continues to go down, it causes periods of price shocks, or spikes in euphoric buying and blow off tops.
Is Stock To Flow Invalid Now?
Basically, the Stock-To-Flow model was focused on the assumption that the decreasing supply combined with increasing demand would create a predictable rise in bitcoin’s price over time. This is the updated version below, but for at least a full year leading up to the 2021 bull run, it predicted a price of at least $100,000 USD per bitcoin, achieved by December 2021. Notice in the chart below, we aren’t even close to the $100k line. In previous versions, it was shown that we’d be squarely at, or above the line by 2023.
When challenged on the idea, the creator of the model says that we misunderstood his intentions, and according to some recent tweets, he’s now predicting $32k some time in 2023. Big difference from $100k!
I’ve listened to some interviews with him and he’s honest about it being a model and not a crystal ball, but I feel like he enjoyed the attention from the model and sort of let people run away with it and didn’t really stop them from predicting crazy things like the model “breaking to the upside” to prices over several hundred thousand USD per bitcoin.
Let me be clear, I got sucked into S2F too. I’m not immune to bullish charts, although I’m getting better at ignoring bullshit like this. (Just being honest here, because I’m not a perfect bitcoiner who gets everything right.)
@PlanB and some people online still claim that S2F isn’t dead, but culturally, it’s dead. Nobody pays it any attention anymore because instead of $100k December 2021 we were in the $40k range and continued to drop over 2022 down to $16k. Not even close! So regardless of whatever mathematical formula was used to retrofit the model and make new predictions about the current price, most people just aren’t interested. It was exciting to watch in the past, but everyone’s eyes are pretty much open to the fact that S2F can’t predict shit.
It’s All Directionally Correct (But Who Cares?)
The thing is that no models can accurately predict price. When you break down any bullish bitcoin chart, it comes down to being directionally correct, but day to day or even year to year they can (and will) be wrong (sometimes very wrong).
So bitcoin is going up and to the right? Yeah, I’m aware.
So you can’t tell me what the price will be next year, but you think in 10 years it’ll be worth more than it is right now? Genius!
That’s basically, what all these bullish models boil down to. Bitcoin is going to be worth more in the future, but nobody knows how fast or how much. Focusing any amount of attention on these charts is a great way to be stressed, depressed, and get rekt.
If you get what bitcoin is about (sound money), then the strategy is to stay humble and stack. Just put a little bit of your savings in bitcoin that you can stand to not touch for several years. If you’re trying to time the market and buy the bottom or sell the top, well, so is everyone else, and good luck with that. Lots of people fail doing it. It’s pretty hard to fail by just slowly stacking into cold storage.
How Can You Tell If Bitcoin Is In A Bullish Moment?
Everyone wants to know if bitcoin is in a bull market because there’s so much money to be made as the price of bitcoin rises exponentially during these periods of euphoria. Well, I can say from experience that it’s hard to predict what’s going to happen, even if you are aware of price cycles. In fact, I’ve been a forced seller more than once because I tried to get cute and take on debt during a bull market.
Looking back, the main way I can tell if bitcoin is in a bull market is through anecdotal observation, which isn’t exactly a repeatable process. For example, when the bull market is ripping, I find myself looking at expensive properties on Zillow. If I’m shopping for a vacation home, and my main worry is if I should buy something close by so i don’t have to fly, then we’re entering a euphoria phase.
Even then, it’s impossible to tell how high well go. It was only three weeks in December 2017 that took us from $10k to $20k, and then the bubble popped, and we wouldn’t revisit $20k for another 3 years.
Top Signs Are Only Obvious In Hindsight
During the 2021 bull run I could see “top” signs everywhere. The NFT craze was full force. Celebrities were showing off NFTs on late night shows. JPEGs of rocks were selling for $1,000,000 or more. Mark Cuban got rugged. Mark Zuckerberg’s sister was making music videos about women in crypto, singing “We’re all gonna make it!”
The trouble was, I thought this was just the first leg of the bull market. I thought we could go higher. I figured I could endure the cringe for a bit longer, and peel a little bit off the top when we hit the peak. Nothing wrong with taking some profits, right? Well, it didn’t happen that way. I didn’t get rekt, since I only hold bitcoin, don’t trade with leverage, and hold my own keys, but my point is that nobody can consistently call the tops and bottoms when you’re in the thick of it.
The charts that predict if bitcoin is bullish can’t say how long it’ll be there, how much more bullish it’ll get, or when things will turn bearish, so it’s best to come up with a different strategy.