That's a fascinating look at the update to the classic Bitcoin Rainbow Chart! The Rainbow 2023 model (often referred to as Rainbow Chart V2) attempts to fix the limitations of the original by applying a more rigorous statistical fit to Bitcoin's price history.
Here is an expanded context and explanation of why this chart model is considered possible and how its core mechanism, fitting separate curves for highs and lows, works.
The Mechanics of the Rainbow 2023 Model
The Rainbow 2023 model fundamentally works by establishing an exponential regression channel around Bitcoin's price movements, but it does so more precisely than its predecessor by splitting the data set.
- Fitting Separate Curves for Highs and Lows
This is the most significant "new" feature and the core of the model's calculation:
The Upper Curve (Red): The model fits an exponential curve (a line on a logarithmic chart) that best touches or encompasses all of Bitcoin's historical cycle peaks (All-Time Highs or ATHs). This curve defines the absolute ceiling of the "Bubble" or "Maximum Euphoria" band.
The Lower Curve (Blue): Separately, the model fits an exponential curve that best touches or runs below all of Bitcoin's historical cycle lows (Absolute Bottoms). This curve defines the absolute floor of the "Fire Sale" or "Capitulation" band.
Why is this important? Bitcoin's price is often characterized by extreme volatility and long consolidation periods. By fitting the two extreme boundaries separately, the model accounts for the widening volatility channel that occurs as Bitcoin matures. The original chart often used a single regression line with multiple standard deviations above and below it, which couldn't perfectly capture the widening gap between cycle highs and cycle lows.
- Interpolation and Logarithmic Channels
Once the upper (Red) and lower (Blue) bounds are established, the remaining bands (Orange, Yellow, Green, etc.) are interpolated between these two fixed boundaries.
This creates a series of logarithmic channels that shrink and expand over time, ensuring the price is always contained within the spectrum, unlike the old model which had "wicks outside the rainbow" during the 2021-2022 period.
The bands act as a heat map of investor psychology, where moving from green (Accumulate) to red (Sell) signifies a transition from fear/undervaluation to greed/overvaluation.
Why the Rainbow Chart is Believable (and its Limitations)
The reason the Bitcoin Rainbow Chart (both old and new versions) is a popular and potentially successful long-term indicator lies in two key concepts unique to Bitcoin's market structure:
- The Logarithmic Growth Trajectory
Since its inception, Bitcoin's price has not grown linearly but exponentially. Even though volatility is high, the price tends to maintain a long-term upward curve when plotted on a logarithmic scale. The Rainbow 2023 model is essentially an excellent visual representation of this logarithmic growth channel. As long as Bitcoin's adoption continues and its supply remains fixed (due to the Halving cycles), it is mathematically plausible that the price will continue to follow an exponential growth curve.
- The Halving Cycle and Investor Psychology
The four-year Halving cycle is crucial to the chart's potential validity.
The Halving (when the supply of new Bitcoin is cut in half) acts as a periodic supply shock.
This shock historically kicks off the large bull runs that push the price from the lower bands (Green/Blue) to the upper bands (Red/Orange).
The subsequent bear markets (pushing the price back to the lower bands) are driven by a cycle of market exhaustion and investor capitulation (fear/panic selling).
The rainbow chart maps the price according to these psychological phases. It is effective because human psychology (fear and greed) is largely predictable, even if the exact timing is not.
Why the Rainbow is Still Not a Full Rainbow That Goes Back Down
This point is essential and highlights the model's fundamental bullish assumption:
It assumes a non-zero long-term floor. A "full rainbow" that eventually trends back toward zero would imply that Bitcoin is a failed asset that will eventually lose all value.
Irreversible Adoption: The chart's design posits that every bull market achieves a higher low than the previous cycle. This is due to permanent adoption (e.g., institutions, nation-states, infrastructure) that creates a higher baseline for the asset, preventing the price from returning to previous decade's low levels.
Exponential Decay vs. Growth: The model is based on exponential growth, not a bell curve or normal distribution that suggests a return to the mean or zero. As long as the network continues to function and the Halving mechanism remains in place, the chart's floor is expected to rise indefinitely on a logarithmic scale.
The Rainbow 2023 model is a powerful, visually appealing tool that is likely to hold up as long as Bitcoin maintains its historical logarithmic growth trajectory and is driven by the cyclical nature of investor psychology and the halving mechanism.
