As the price of Ethereum continues to be volatile, it’s becoming increasingly difficult to keep up with its latest price trends. One tool that has been helping us make sound ETH investment decisions over the past couple of years is the Ethereum Rainbow Chart.
It is a colorful chart that offers a unique visual representation of Ethereum's price performance over time. You can use it to gain a better understanding of Ethereum’s long-term trajectory or make short-term market movement predictions.
In this article, we’ll dive deeper into what Ethereum Rainbow Chart is and how it can help you step up your ETH trading strategy.
Technical Analysis and Charts
Technical analysis is the process that differentiates between gambling on crypto and investing in crypto. Here’s how.
Investing into a random crypto asset without much forethought or research would be no better than gambling. This is because the price can go either direction and you’d have no way of knowing beforehand. This strategy can result in significant losses of your hard-earned money.
On the other hand, technical analysis involves analyzing statistical trends, charts, and other analytical tools to understand the historic price trends of a crypto asset. This understanding will help you make more educated decisions about when and where to invest — greatly increasing your odds of success.
Some of the most popular types of crypto technical analysis charts include:
Each of these has its own key advantages. Scatter plot charts, for example, are easy to read at a glance. But the indicator that we’d like to focus on here is the Ethereum Rainbow Chart as it is a valuable tool for long-term ETH investment.
In essence, the Rainbow Chart plots the logarithmic price history of Ethereum on a rainbow made from 9 different colors. Each of these colors represents a different market sentiment and includes recommendations on what to do at that stage. Let’s take a closer look at the components of this chart.
Understanding the Ethereum Rainbow Chart
The current Ethereum Rainbow Chart is modeled on the same ideas as the Bitcoin Rainbow Chart which was launched back in 2014. The one we use on a regular basis was launched in May 2021 by blockchaincenter.net. It skips the first few months of Ethereum’s price data and begins in January 2016.
The x-axis of this chart shows a broad passage of time with the only markings being the beginning of a new year. On the other end, the y-axis is the price of ETH presented in USD. An important point to remember here is that this price is not evenly spread out. Instead, it’s listed in an alternating order of multiple of 2 and multiple of 5, i.e. 1, 5, 10, 50, and so on.
Then there’s the arched rainbow with the price of the ETH represented as a line graph on top. Here’s how you can interpret its colors from top to bottom:
(Do note that these are not the official names for these colors.)
Importance Ethereum Rainbow Chart
Understanding these nine colors can give you a great overview of ETH’s performance over the years, without the noise of daily volatility. You can then use this knowledge to make smart and educated long-term investments in this crypto asset.
How To Use the Ethereum Rainbow Chart
Now that you have a basic understanding of what the elements of the Ethereum Rainbow Chart mean, it’s time to dive deeper. Here’s what each color on this chart means for your investment strategy:
The market is in an overvalued bubble that can burst at any time. Here it’s best to sell your ETH assets and wait for stability.
It is a good time to sell your Ethereum before it enters the unstable bubble state.
After seeing the rising prices, more and more investors are investing in ETH. Now might be a little late to invest.
The price is starting to go up which can indicate an upcoming bubble but nothing is guaranteed. Better avoid more investment.
Ethereum prices are fairly stable without much upward or downward movement. You should hold on to your ETH assets and wait for a price hike.
The price is lower than it should be, but it is still not low enough to purchase more Ethereum.
ETH's price is low enough to make it a sound investment. It would be a good idea to start accumulating more coins.
The Ethereum crypto asset is undervalued and should bounce back at any time. It’s an ideal time to purchase more.
Ethereum is basically on a fire sale where buying the dip could mean massive profits in the near future.
Understanding Ethereum Rainbow Chart colors
Do not think that the colored bars of the Ethereum Rainbow Chart are separated from each other, that would only lead to misunderstandings.
For example, let’s say the price is in light green. If you look at it on its own, you’d assume that ETH's price is fairly stable and you should hold onto your assets. But, if the price is returning after a burst bubble, it might go down further. So it wouldn’t be a bad idea to sell your assets and wait for a larger drop to invest again.
In short, look at the overall movement of Ethereum’s price and don’t become fixated on any single color.
Limitations of Ethereum Rainbow Chart
The Ethereum Rainbow Chart is a reasonably successful indicator of broad market movement. But it also has several major limitations that you should keep in mind when using this chart for strategy development.
For example, Ethereum Rainbow Chart shows market trends at a very zoomed-out scale which does not include market volatility. While this is great for simplification, it is not suitable for properly understanding the current market situation.
The Ethereum Rainbow Chart does provide a unique way of interpreting ETH price history. Its color bands show insight into the market mentality and the chart as a whole displays the long-term investment potential of Ethereum.
However, it is nowhere near a perfect technical indicator. So, your best option is to utilize the Rainbow Chart alongside a number of other useful indicators like the Relative Strength Index, and Moving Averages. If you find the Ethereum Rainbow Chart useful, you may also want to have a look at the Bitcoin Rainbow Chart, which we explain here.