A bankruptcy judge ruled that digital coins deposited in Celsius Network LLC’s interest-bearing accounts belong to the firm, ruling against thousands of customers and deciding a key legal issue in crypto-related insolvencies.

Judge Martin Glenn said Wednesday that $4.2 billion in cryptocurrency deposits are the property of Celsius, clearing the way for the company to use its digital assets as it sees fit, while also dealing a blow to the hopes of thousands of customers by declaring them unsecured creditors.

The question of who has ownership rights over crypto assets at bankrupt digital exchanges, trading firms and other platforms is central to the chapter 11 cases of Celsius and other firms that went bankrupt last year, including FTX and BlockFi Inc.

Each firm’s rights to its customers’ digital assets are spelled out in their terms of use, and Celsius’s contract with its users is “unambiguous” about the firm’s ownership rights, Judge Glenn said in his ruling. Bankruptcy courts have only begun to unravel what those terms of use mean for the billions of dollars in cryptocurrencies trapped on insolvent platforms.

Many customers have clamored for the quick return of their crypto, arguing that the funds aren’t the property of the Celsius bankruptcy estate. The firm’s lawyers, however, argued that the terms of use—approved by users with the click of a button on their mobile devices—granted the ownership rights to Celsius so it could lend, sell, pledge and use the assets for investment purposes.

Wednesday’s decision affects 600,000 holders of high-interest Earn accounts at Celsius, holding cryptocurrency worth $4.2 billion as of its bankruptcy filing in July. There isn’t enough value available in Celsius to repay all account holders in full, and declaring that some customers’ assets belong to them alone would decrease recoveries for other users, the judge said.

The immediate impact of the decision is to allow the company to sell $18 million in stablecoins to fund the expenses for a longer stay in chapter 11. Celsius executives have testified in bankruptcy court that the firm will run out of money by March, and will need to raise funds to cover the expenses of staying in chapter 11 beyond that point.

Earn accounts make up the bulk of customers’ deposits at Celsius, which entered bankruptcy with a roughly $1.2 billion hole in its balance sheet. A ruling that most Celsius customers are unsecured creditors means they’ll have to wait for the company to formulate a restructuring plan, find buyers for its assets or liquidate its crypto before they can get any of their funds back.

Several state regulators and a handful of customers had argued that the language in Celsius contracts is ambiguous, and noted that many customers didn’t read, understand or sign off on the document. Judge Glenn, however, ruled that Celsius offered convincing evidence that over 99% of users approved a recent version of the terms of use for the interest-earning accounts.

The judge said he “empathizes with the frustration account holders may feel if they didn’t read or understand the specific terms of use.” Celsius updated its user agreement eight times and, along with the more recent changes, threatened to suspend the accounts of users who didn’t consent to the new terms.

Some customers argued that Celsius’s former chief executive, Alex Mashinsky, misled them in videos on social media and public appearances touting their continued ownership of digital-asset deposits. Judge Glenn, however, noted that none of those statements were submitted as evidence and that even if they were, they would not count as modifications of the contract between the company and its customers.

Celsius has agreed to return a fraction of crypto to holders of other accounts where the assets were held in custody and customers retained the ownership rights.

Judge Glenn noted in his ruling that he also has yet to rule on the legal status of over $700 million in crypto assets held as collateral against fiat loans to retail customers.

Write to Soma Biswas at soma.biswas@wsj.com