when I put a little hole at the tip of my sheaths it isn't there for letting water drain out, even though I refer to it as a 'drain hole'.
Most leather sheaths seal up fairly well when the knife is in them since the knife blocks the opening.
It could be argued that a drain hole actually allows water that would otherwise not have access, in.
The type of knife I usually design a sheath for that has a hole is a knife that's going to get dirty often, and bring stuff from outside the sheath inside, say pine needles or chunks of bark or whatever.
In that case, as the esteemed gents above described, the sheath can be cleaned out where the detritus is going to end up. For that, compressed air, or a twig, pipe cleaner or whatever can loosen up the shmutz packed at the bottom of the sheath so that it can be dumped out.
When I put a hole there, it's right at the very tip of the knife, or at the tip of the inside of the welt. Any higher and it loses its effectiveness for what I want it there for.