Introduction
I often have a look at bitcoin charts. The one I like the most is the rainbow chart from www.lookintobitcoin.com. The live chart can be found here : https://www.lookintobitcoin.com/charts/bitcoin-rainbow-chart/. The rainbow chart shows possible entry(buy) and exit(sell) points. This is by no means financial advice. Proceed with caution and never put in more than you are willing to lose. That said, we are all gamblers here. On we proceed 😁.
The rainbow chart looks like this:
What follows below is me attempting to modify the rainbow chart by removing the bands and adding the rainbow colours to the line of the chart. The final product will be a chart that has a line that changes colour depending on which bow is located on the rainbow. The idea is to create a similar chart as the greed and fear index chart that can be found here : https://www.lookintobitcoin.com/charts/bitcoin-fear-and-greed-index/. I made my own greed and fear chart, which can be located here : https://www.kaggle.com/code/lindleylawrence/bitcoin-fear-and-greed.
Dataset
This is a time series dataset of the price of bitcoin from 28 Oct 2015 to 5 Oct 2023.
You can find my notebook here.
Charts and tables
Just by quickly looking at the chart you can come to the below broad assumptions:
Bitcoin S2F trading rule
The above can be used with the Bitcoin Stock to Flow trading rule. The Bitcoin S2F trading rule is a bitcoin investing strategy whereby you buy 6 months before the havling and sell 18 months after the havling. For more on the S2F trading rule you can check out this video : https://www.youtube.com/watch?v=GJXl_bCQMKc/
Our data is from Oct 2015 so we will only use the 2 halvings instead of 3. If the The Bitcoin S2F trading was implemented one would have done pretty well for both halvings.
The period from Jan 2016 to Dec 2017 shows a 31x return on investment and 7x return on investment if you invested in Nov 2019 and sold about 2 years later. Both the bitcoin rainbow chart and the Bitcoin S2F trading rule show that it was a good time to buy around 2016 and 2019 and a good time to sell around late 2017 and late 2021.
Conclusion
Although the bitcoin rainbow chart is a relatively good measure of when to enter and when to exit, one should never rely on just one indicator for your investment strategy. As we see using the bitcoin rainbow chart with the Bitcoin S2F trading rule can add more confirmation of possible entry and exit points. There are other tools that can also be added to your strategy as well like:
Rob from Digital Asset News talks about these indicators here.
Farewell
