How a food color behaves during baking depends on what chemical is producing the color. Most of the liquid food colors sold in grocery stores in the US are artificial colors, and do not hold up well in baking. They can be very sensitive to pH, or the acidity of your batter- and fade. Natural colorings can be just as bad, by the way. Gel food colors are generally formulated for baking though, which is why they tend to be more successful in maintaining color during baking. It's also a pretty tall order for any coloring agent to turn what is essentially a darkish brown batter into a bright red one- because it's not paint pigments, after all. If you are not squeemish, and are determined to use a "natural" coloring, then I would recommend a cochineal coloring derived from crushed cochineal beetles. Otherwise, seek out gel colors designed to use in baking. The other thing to keep in mind was that the original "red velvet" cake was not actually all that red. It was a reddish brown color, produced by the interaction of the cocoa powder with other ingredients like buttermilk or vinegar, which were acidic. It was meant to be a chocolate cake, after all- not a tasteless bright red creation. The main difference between a red velvet cake and a "devils food" cake was that one used cocoa and the other used regular chocolate. Food colorings were added to accent the reddish tint cocoa produced. Personally, I prefer either the more original versions to the kind turned bright red, but that's each baker's choice.
I agree with Lori. I also just want to add that the addition of too much food coloring sometimes leaves the cake with an off putting chemical aftertaste.
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