Presiding over the chapter 11 case of FTX Trading Inc., Bankruptcy Judge John T. Dorsey of Delaware said he was the first judge to have “estimated the value of cryptocurrency-based claims” and was the first to have “conducted a valuation of crypto-type assets.”

Although Judge Dorsey was placing values on peculiar types of crypto claims, his opinion could be a precursor telling creditors in cryptocurrency cases to expect low valuations for their claims.

Judge Dorsey began his June 26 opinion by pointing out why the valuation of crypto assets is so unlike pegging the value of assets more typically involved in bankruptcies. “First,” he said, “cryptocurrencies have no inherent value,” and they “trade solely on sentiment.” Consequently, he said there is “no underlying value to help inform the market value of these assets.”

Other problems faced Judge Dorsey. He was being asked to value three so-called utility tokens, not the more familiar transactional tokens such as Bitcoin. But there were still more problems.

In the debtor’s motion to estimate the value of claims under Section 502(b), Judge Dorsey said that the debtors held 99%, 97% and 95% of the three utility tokens, meaning there was little trading to which he could peg value. The three creditors involved in the valuation held claims for only a small portion of those held by the debtor.

Given that the debtor held most of the tokens at issue, Judge Dorsey said that “any increase in trading is likely to have a negative impact on the price of the asset.”

And if that wasn’t enough, there was another problem: Judge Dorsey said the tokens were “subject to a contractual obligation to keep the tokens ‘locked’ until a future date.”

The debtor and the creditors each proffered testimony from several experts who assigned wildly different values to the tokens. Judge Dorsey rejected the valuation model proffered by an expert for the debtor. Although he found the model offered by the creditors to be “appropriate,” he found “problems” that prevented him “from adopting the discounts [that the expert] suggests.” In other words, Judge Dorsey was adopting a model of his own.

Although Judge Dorsey modified the creditors’ model, the creditors likely were not happy with the results. He decided that one of the tokens was worthless, and a second had only 0.1% of the trading value for tokens of the sort on the filing date.

However, Judge Dorsey decided that the third token was subject to an 18.6% discount from the filing date trading values.

Recognizing that two of the three tokens had a valuation of “nothing,” Judge Dorsey offered an apologia, saying he was “cognizant of the Objectors’ argument that such a valuation is in tension with the fact that the Tokens had a positive trading price on the Petition Date.” Although the tokens had value in the market on the filing date, he said that “the evidence suggests that the market prices for these Tokens may not be a reliable indicator of their actual value.”

Judge Dorsey explained why holding 95% to 99% of the tokens was not the only reason for reducing the value dramatically. He quoted one of the experts as saying,

[R]estricting the free float for the at-issue tokens was a deliberate strategy for FTX and Alameda to inflate the market prices of the at-issue tokens, and in turn inflate the value of FTX’s and Alameda’s balance sheets. Mr. Bankman-Fried had also commented that a strategy of allowing only a very small free float relative to the maximum supply of a token would enable the creator of the token to artificially inflate the trading price of the token and thus create collateralizable “value” for holders of the uncirculated tokens, even if the true value of the token were zero.

In other words, Judge Dorsey said, “The simple fact that the Debtors held nearly all of the supply of the Tokens at issue had the effect of keeping trading volume low and, quite possibly, keeping prices artificially high.”

Judge Dorsey entered an order discounting the value of the tokens by 100%, 99.9% and 18.6% of the market prices on the filing date.