The Bitcoin Rainbow indicator is, for the first time in months, indicating that Bitcoin is in the “Fire Sale” zone.

Initially created to poke fun at the Regression Formula in Bitcoin trading, the indicator currently points to duress among traders amid free-falling crypto assets.

What is Bitcoin Rainbow Indicator?

The Bitcoin rainbow indicator has nine zones, capturing the state of market conditions.

Specifically, each color follows a logarithmic regression but is arbitrary and has no scientific bias. This is because the chart “highlights how silly it is to think that you can trade Bitcoin profitably based on a regression formula”.

The whole purpose of the Rainbow chart is to highlight how silly it is to think that you can trade bitcoin profitably based on a regression formula

— Eric Wall (@ercwl) December 21, 2020

Although an article on Blockchain Center issues a disclaimer stating that the indicator might not be reliable, a Redditor is confident that it could successfully guide traders if used correctly.

Notably, the supporter says the technical indicator is effective for believers of Bitcoin’s four-year cycle, the period it takes for Bitcoin to half.

What the “Fire Sale Zone” Means

There are nine zones in the Bitcoin Rainbow chart. The fire sale zone is the last color band that indicates the best buying chance.

Still, this should be taken with a grain of salt, considering the volatile nature of the crypto market and the extreme fear amongst traders.

At spot rates, BTC has tanked by over 60 percent from November 2021 peaks, and with failures of top DeFi products, analysts fear the worst if prices drop further.

Besides the Bitcoin Rainbow Indicator chart, there are other sentimental indicators, such as the Fear and Greed index. Contrarian traders can use these to fade the primary trend and double down on falling prices.

The position contrarians hold, should they load the dips, will align with comments by crypto permabulls, including Fidelity CEO Abigail Johnson. Recently, she said that with falling Bitcoin and crypto prices, investors should take this opportunity to buy more assets and take advantage of the crypto winter when prices are available at a discount.

While technical indicators can be useful, traders should use them for guidance in trading decision after carrying out deep research on a topic.