There are many cryptocurrency trading tools designed to help investors make decisions.
Because of crypto’s inherent volatility, these tools aren’t necessarily 100% accurate.
The workings of the market are dynamic, and more than one factor is responsible for the upward and downward trends in market prices.
With BTC, these changes are even more profound and affect the fortunes of altcoins in the market.
The Bitcoin Rainbow Chart was designed to help investors predict market fortunes and know when to buy, sell and hold cryptocurrency.
However, experts are dubious as to its long and short-term reliability. Besides, current market trends have been so divergent as to nullify any genuine attempts at predicting the market.
Nevertheless, the BTC Rainbow Chart remains a popular tool for many traders. Read on to learn more about it and whether it’s ideal to use it for Bitcoin investment.
2022 Crypto Market Trends
If 2021 was the year of the crypto boom, 2022 has been the opposite.
In short, the crypto markets are currently in a state of collapse. May and June saw the worst drops, with roughly $1 trillion in cryptocurrency values lost. Bitcoin was the worst hit, with peak prices of $69,000 in late 2021 sliding down to less than $20,000 by mid-2022.
The impact has been profound for many investors with Bitcoin in their portfolios looking toward long-term profits. Mining companies around the world have been hard hit too.
Given that the global economy is still reeling from the effects of the coronavirus pandemic, such a poor market trend couldn’t have come at a worse time for investors.
Nevertheless, BTC prices continue to slide, with the anticipated increase in US Federal interest rates sure to negatively impact cryptocurrency prices.
BTC hasn’t been the only scapegoat in the downward trend. Ethereum’s prices have slid and are down by nearly 70%, mirroring BTC’s equally fortunes. In contrast, ETH was trading at almost $5,000 in late 2021.
Altcoins like Cardano, XRO, and Cardano have also suffered dips, although not as drastic as those of BTC and ETH.
Traditional stock markets have suffered, too, with major indexes like the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average suffering significant hits.
This link between cryptocurrencies and traditional stocks is so because institutional and retail investors are investing in crypto more than before.
Experts predict that this trend will continue for the foreseeable future. However, it’s important to note that digital stocks like BTC are vastly different from traditional stocks.
That’s why predicting its rise and fall is so difficult. With the Bitcoin Rainbow Chart, this task is made somewhat easy.
Let’s take a look at this interesting tool and how it works.
What is the Bitcoin Rainbow Chart?
The Bitcoin Rainbow Chart was initially created to serve as an interesting visualization for Bitcoin enthusiasts to appreciate. However, it took on more useful purposes as it was found to have a high degree of accuracy.
The tool was initially developed in 2014 by a Reddit user name Trololo. Subsequently, it was improved upon by another individual, the CEO of Holger, who introduced his unique logarithmic regression technique.
The tool was designed to highlight marked changes in BTC prices. Since then, it has been adopted by many investors for long-term strategy development.
The chart comprises different colored bands similar to an actual rainbow, with each color indicating when to make moves in the market.
There are nine colors in total, with blue and red being the limits to either end. When the line moves toward the blue band, it means that BTC’s price is falling, while a shift in the opposite direction to the red band indicates a price appreciation.
Pros and Cons of the Bitcoin Rainbow Chart
Although it’s a popular tool with investors worldwide, the BTC Rainbow Chart has its own demerits.
Admittedly, it has a long history of consistent accuracy. The logarithmic regression technique, in particular, is an excellent tool for several assets with different volatility levels.
With the BTC Rainbow Chart, investors find buying, selling, or holding crypto easier.
However, there are notable demerits.
The tool’s accuracy noticeably dwindles when applied to non-long-term investment strategies. Despite its track record for accuracy, there’s no guarantee that this trend will continue in the long term.
The Bitcoin Rainbow Chart’s nine bands indicate the following:
Light-green: Underpriced and affordable
Yellow: Hold on to BTC
Light Orange: Potential market bubble
Orange: Fear of missing out
Dark Red: Maximum market bubble
Analyzing the BTC Rainbow Chart
Bitcoin is a unique asset class, not because it’s a revolutionary means of digital payment, but because its prices change so quickly and often.
Although it’s in high demand, typified by its general upward price adjustments, BTC remains subject to market cycles.
In these marker cycles, its prices alternate frequently, sharply increasing and declining. As a result, investors must be wary when investing in such an asset.
The BTC Rainbow Chart provides pictorial insight into prices within the market cycles. The insight from analyzing the tool can help make informed investment decisions.
However, it has no scientific backing, and as such, it doesn’t count as investment advice.
When the market is overheated, the line drifts towards the chart’s upper colors, and many investors have successfully capitalized on this trend in the past.
A shift toward the opposite end of the Rainbow spectrum indicates a market depression, where investors sell off assets and a generally uninterested in buying the token. The Chart indicates that this period is often the best for investors to buy low and hold on to tokens.
As a result, the BTC Rainbow Chart has strong backing for accuracy, as its movements have not deviated from real-life market trends for many years. Therefore, most traders adhering to its predictions have made a profit.
Investors should note that the chart’s regression lines are based on long-term price fluctuations, despite the tool being based on recent market data.
As the chart compares adoption rates and future pricings, there’s no need for regular adjustments that would have been useful for short-term predictions.
The lines of the logarithmic regression chart are made up of upper and lower market prices. Hence, potential price fluctuations to the middle of the fixed ranges will be unreliable.
Alternatives to the Bitcoin Rainbow Chart- Trading Bots
Trading bots aren’t precisely crypto prediction tools. However, they’re excellent at conducting trades and executing transactions on behalf of investors.
They’re an innovation that’s fast gaining adoption with several investors.
By subscribing to a trading bot tool, you can gain AI-powered insight into trading and investment decisions. With each bot offering various features and boasting strengths and unique specializations, it’s essential to choose the one that’s best suited to your needs.
After downloading the code from the developer, you can go on to integrate them into your trading platform.
A crypto bot isn’t going to replace your decision-making across different exchanges. You’ll still have to fund your wallet and make deposits. To a large extent, the final choice still rests with you.
However, a trading bot can be highly effective when used with other trading tools such as a Bitcoin Rainbow Chart.
It is far from a get-rich-quick scheme for investors, as you’ll still have to put in some work. Hence, you still require an excellent understanding of the Bitcoin market, particularly the factors that influence the rise and fall of crypto.
Recommended Investment Advice
Genuine crypto recommendations and actual scams can be hard to distinguish, as many sharks are waiting for you to make an error and steal your money.
With a unique trading strategy, you can avoid these pitfalls. Anytime you get overwhelming information about Bitcoin, take a step back to analyze things objectively.
Additionally, you should learn to manage risks. Avoid going all in and put in only what you can afford to lose. To do this, it’s best to set limits on each investment.
Just as well, portfolio diversification is an intelligent technique. Bitcoin is a great asset to hold on to for the long term. However, you should top it off with some promising altcoins, especially Ethereum.
A long-term outlook is the best trading strategy. Avoid buying the dip simply because everyone is doing so. That BTC’s price is low doesn’t necessarily mean that you’re getting a bargain.
There’s no fixed or guaranteed method to predict cryptocurrency prices.
With tools like the Bitcoin Rainbow Chart, investors can make reasonably accurate long-term price predictions to make the right moves in the crypto market.
Although the Bitcoin Rainbow Chart has shown high levels of accuracy throughout its 8-year history, it’s still not sure-fire advice. You can make errors, which is not the best short-term forecast tool.
To be a successful investor, you need to combine trading tools like the BTC Rainbow Chart with other methods like trading bots and have excellent knowledge of market workings. The latter cannot be overemphasized.
Unlike what many people think, crypto investing isn’t easy money, and you have to work steadily to earn steadily from it.
Staying abreast of the latest market trends and updating your knowledge base of trading techniques and blockchain technology is your surest way to success.
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