There are no hot-tubs. No super-yachts. No models in bikinis. My first encounter with Kim Dotcom is disorienting in many respects, not least for the complete lack of luxury goods and inappropriately dressed women present. Before seeing him take to the stage in Christchurch, the largest city on New Zealand's South Island, my image of him has come almost solely from the internet: I've seen him posing next to fast cars, sitting on private jets, cavorting with hot chicks. I've seen him holding automatic weapons, gurning in front of helicopters and partying at his house, the so-called Dotcom Mansion, New Zealand's most expensive private home, just outside Auckland. All 6ft 7in of him: a larger-than-life German-Finnish multimillionaire internet mogul-cum-international playboy for whom money, taste and conventional notions about what constitutes an obscene display of wealth have never been any object.

But at Christchurch's cardboard cathedral, a striking temporary structure erected after the city's devastating earthquakes, there are no babes or expensive consumer items. Kim Dotcom's Twitter profile pic shows him as a shadowy figure in a black beret and sunglasses, but in the flesh he comes across less like an international fugitive from justice than a misplaced German exchange student. He's 40, and dressed in black as he invariably is, but there's still more of the teen geek about him than cyber outlaw being hunted by the FBI. Though that is exactly what he is: in the last two years, the founder of the file-sharing website Megaupload has become, for many, an internet folk hero. The US government alleges he is a pirate, a career criminal who swindled the Hollywood studios out of their rightful copyright earnings, and they are desperately trying to extradite him from his adopted home in New Zealand to stand trial in the US, where he faces up to 88 years in jail. To others, younger people predominantly, he's up there with Assange and Snowden: a web freedom fighter unwilling to kowtow to the US government's bullying ways.

At the event in Christchurch, he's articulate, intelligent, personable and in command of his facts, a naturally charismatic public speaker who has drawn a capacity crowd. The reason he's on stage is because his extraordinary career, one that includes three stints in jail, has just taken an even more extraordinary twist. He's founded his own political party, the Internet party, which he claims will be the start of a global political youth movement. And if this sounds like so much hot air, you'd be right… except that, in an even more bizarre twist, he may – may – succeed in bringing down the New Zealand government, a rightwing coalition led by former banker John Key.

On 15 September, five days before New Zealand's general election, Dotcom and Glenn Greenwald will be holding a press conference in Auckland at which Dotcom claims they will unveil explosive new revelations relating to the NZ and US governments' spying programmes. And owing to the country's highly complex proportional representation system – think Borgen-style machinations – the Internet party, and its alliance partner, Mana, a Maori social justice party, could hold the balance of power.

It's as if Julian Assange decided to form a UK parliamentary party today and by Christmas became the new Nick Clegg. If you can imagine how that would go down in the British press, you'll get some idea about how this is being received in New Zealand. As a resident but not a citizen, Dotcom can't stand, but he's bankrolling all the other candidates and has spent £2.5m so far, more than any other party fighting the election. And it's working: the latest polls show InternetMana is set to win five seats.

David Fisher, a journalist at the New Zealand Herald and the author of The Secret Life of Kim Dotcom, tells me that he paid no attention when Dotcom first told him he was thinking of entering politics last November. "I said, 'Don't you have better things to do with your time?' And I didn't think much of it. You know, he sits in the gold mansion and comes up with ideas and I didn't take it seriously. And when he actually did it, I thought, 'That's madness. How on earth are you ever going to make an impact?'"

Dotcom onboard a yacht in 2000. By 2010, he was personally making $42m a year. Photograph: Action Press/REX

But then he formed the strategic alliance with Mana, which already had a sitting MP, and in a spectacular coup brought a veteran leftwing former MP on board as the party's leader, Laila Harré. "She has a massive amount of credibility," says Fisher. "It really took people by surprise. I was still trying to unscramble my brain when I suddenly thought, 'You cunning bastard. You are actually going to do it!' We're in a system where you have to play the percentages and Dotcom has – quite cynically – worked out a way to make every sliver of a percentage work for him."

Playing the percentages, working the odds may be what Dotcom has always done. He's a serial entrepreneur who's always skirted the far frontier of what the internet can do, both technologically and legally. The son of a German father and a Finnish mother, he was born Kim Schmitz and grew up in difficult circumstances in Munich. His father was an alcoholic and he and his mother were both beaten and abused. To this day, he says, he can't bear to see a man display any sort of violence to a woman. "And I've never drunk a drop of alcohol. I've never wanted to know if that was in me."

His outlet and escape was computers. He badgered his mother for a Commodore C-16 computer and that was it. "I never had any interest in school at all after that." When he discovered hacking, though, as he tells the crowd in Christchurch, it was "curiosity" rather than law-breaking per se that motivated him. He was the classic teenage hacker. He broke into Nasa's website, among others, "because I wanted to find out if there was any evidence that aliens existed". Eventually, he was caught, tried and briefly imprisoned. The judge saw he had potential and suggested he used his skills for good. And he did. "I wrote a business plan, got a $1m interest-free loan from the German government and set up a data security business."

Within two years, he says, he paid off the entire loan. And it's these kind of opportunities that he says he wants to bring to New Zealand. The Internet party wants to make the country networked, to invest in education and new infrastructure – at the moment it only has one submarine cable through which all internet traffic travels (via the US) – and to diversify the economy from its current reliance on agriculture. Tertiary education would be free, he tells the crowd, Wi-Fi would be everywhere – even mobile reception is patchy in rural areas – and social justice would be served by increased opportunity for all. At the moment, he points out, "talented graduates go abroad… and they don't come back". The internet, and the possibilities created by it, is where future growth lies, he tells the crowd. And it's the job of the rising generation to create it.

"But a lot of people are saying I set up the Internet party to help with my extradition case," he tells the audience. "Which is rubbish." And then he tells his story as he sees it. Megaupload was one in a long line of websites and businesses that he'd set up, but by far the most successful. At its peak, it was estimated to be the 15th most visited website in the world, used by more than 50 million people a day. And by 2010, he was personally making $42m a year. It was essentially a cloud storage system that enabled people to share content. It was what it was storing and what they were sharing that is the point of contention and the trigger for what happened next. Dotcom had been living in Hong Kong but in 2008 he visited New Zealand on holiday and he and his wife, Mona, decided they liked it. They wanted to buy a house and spend part of the year there and he applied for residency. Despite his criminal conviction for hacking and a later one for insider trading, he got it.

These were the days of the yachts and cars. At the mansion, from his custom-made $100,000 bed, he ran his business by night and devoted himself to becoming the number one player (out of 15 million) of the online game Call of Duty.

And then it all changed. The reason he founded the Internet party, he says, is because of the "enormous injustice" his family experienced during what has become known as "the raid". It involved 77 officers and two helicopters descending in a dawn swoop on the Dotcom mansion, where his three children and then seven-month pregnant wife were also living. Dotcom and three of Megaupload's co-founders were arrested (and another three arrested abroad). It was the biggest, most dramatic raid to ever take place on New Zealand soil and was instigated on behalf of the FBI. This shocked the country. "New Zealanders are sensitive to the idea of being directed by the US, which dates back to the country's ban on nuclear warships in the 80s," says Bryce Edwards, a columnist for the New Zealand Herald and lecturer in politics at Otago University. "We stood up to the most powerful nation on Earth then, but at the same time we were a victim of it."

Dotcom in an Auckland court following the raid on his home in 2012. Photograph: Fairfax Media via Getty Images

The raid, and what it said about the government's relationship with the US, brought back unhappy memories. It was the first time most people had heard of Dotcom, but after he got bail and went on New Zealand TV to explain himself, there was an upswelling of support. "I explained what my website did. How it was a product that was simply an efficient and super-fast way of transferring files. It was basically like a hard drive that is connected to a computer but it was connected to the entire internet for everyone to use. It was completely benign on the copyright issue… they are not saying that I hurt people or that I'm selling drugs or that I'm dangerous. What they are saying is that people have used a website I've created to upload movies and so on." And then he asked the crowd: "Does that justify the kind of force that was used to terrorise my family?"

Others saw Megaupload differently. There's no doubt it was used to share pirated films and music, but so were a lot of other sites. And the terms of America's 1998 Digital Millennium Copyright Act protects websites, including the likes of Facebook and YouTube, from being prosecuted for hosting illegal content as long as certain steps are followed. It's a fine legal line, but according to Fisher, he certainly "spent a huge amount of money on lawyers and put a lot of effort into finding where that legal line was".

Yet Megaupload was shut down across nine countries, Dotcom's assets were seized across 10 jurisdictions and 220 employees lost their jobs. An extradition order from the US government was served. Copyright is a civil offence, but, uniquely for a case involving the US government against a website, Dotcom was charged with money-laundering and racketeering: criminal offences. Extradite-able offences.

He should have left New Zealand's shores months ago. But all was not as it seemed. As Dotcom fought the extradition order through the courts, incredible details began to emerge. An unlawful court order was used to carry out the raid. Process was abused multiple times in multiple different ways. Edwards fills in the details: "He was spied on illegally. Laws were broken. The government now admits that. It's a spectacular narrative in which he has definitely had an injustice put upon him. And not just by the New Zealand government. It was arguably at the behest of a large foreign power. It's really just an argument of whether it was for the greater good."

The issues that Kim Dotcom's case brings up are issues that are at the forefront of what is increasingly being seen as the war for the internet: copyright, privacy, intellectual property, the right to one's personal data. It raises questions about who polices the net, who owns it, how governments respond to it and what personal freedoms they are willing to sacrifice to protect both state and corporate interests. And, crucially, just how far they are prepared to go to enforce it.

Two days later, I travel to Queenstown, a ski town that is the adventure sports capital of New Zealand. A PA shows me up to Dotcom's hotel suite where we find him sitting outside on his balcony. The view is of a vast panorama of cloud-wreathed mountains but he doesn't appear to be looking at it. He's glum, exhausted, feverish, ill. It's a chilly day and when he comes inside he leaves the balcony door open but he's visibly sweating. For five weeks, he's been doing nightly "roadshows" in small towns across the country. New Zealand's political commentators have had many things to say about the entry of a foreign multimillionaire into their electoral landscape, but no one can argue that he's not putting his back into it.

It's almost impossible to connect the sober, slightly sullen figure in front of me to the flamboyant playboy who liked to drive fast cars and visit nightclubs; the self-invented character who changed his name to Dotcom in 2005. He avoids holding eye contact at first and he has a lawyer's command for detail; he meticulously spells out the injustices he feels have been committed against him. The fun-time guy has well and truly left the building. Does it feel odd when you look at how your life has changed in the last few years? I ask. He sighs.

"I was living in this really happy bubble before. I was completely blind to most issues. Yes, you know that the US government lied to invade Iraq, and you know they shouldn't drone people, and that they shouldn't be building this massive spy apparatus. You know that. But as long as it doesn't affect you personally, you're like, 'You know, I'm living a happy life, who cares?' But it's become my problem because all my rights are being pissed on and I'm being abused, but the average Joes don't care because it doesn't affect them. At least that's what they think. That's what I thought. But I was wrong. And once you're hit by it, you'll understand."

The law, he says, was "hacked". "With Sony Betamax, the supreme court ruled that as long as you have a technology that can be used for both good and bad, you can't shut it down just because some people use it in the wrong way. We had a takedown tool for content owners, our record was clean, we had 13 million takedown notices [from copyright owners] and we took down every single thing… so this indictment, the way they had scripted a story of us being a mafia organisation, a mega-conspiracy, they called it. I was just gobsmacked. I couldn't believe it."

Dotcom was an entrepreneur. But he says he's been forced by the actions of the US government to become political, to come out fighting. He is furious about what's happened to him. "I have been radicalised absolutely. And the craziest thing of all is that I feel differently now about those people who hate America so much. I'm kind of seeing it from their perspective."

He is, he claims, where mass surveillance has come home to roost. Because what Dotcom and his lawyers discovered was that his personal data going back for years – emails, phone calls, texts, Skype calls – had been harvested using the 5-Eyes spying system. This is the intelligence alliance that exists between Australia, Canada, New Zealand, the UK and the US that Edward Snowden described as "a supranational intelligence organisation that doesn't answer to the laws of its own countries".

"They used XKeyscore, which is basically the Google of the 5-Eyes cloud, and they've downloaded everything, every single email, every single chat message," he says. And it was this archive of information that was used to construct the case against him. "Then after they admitted they had spied on me, they then revealed they had 'aged off' the material, meaning they'd deleted it."

It's the crux of one of the best arguments that is used against the gathering of mass data: if you combed anyone's collected digital archive, you could construct some case against them. Or as Cardinal Richelieu put it: "If you give me six lines written by the hand of the most honest of men, I will find something in them which will hang him."

Is Dotcom honest? Innocent? That has yet to be proved one way or the other. But what is uncontestable is that the US government had a lot more than six lines with which to construct its case. He tells me: "I'm probably the one individual in the world who is closest to getting discovery on what this material is, on getting visibility around this kind of spying, and what mass surveillance actually means to an individual like me. I'm the closest anywhere in the world in a relatively good judicial system to getting the answers that they are trying to cover up. I am entitled to that data; it is a much more complete set of data than I have and it would completely exonerate me. They are sitting on a trove of evidence that I could use in my case… so what they did in order to prevent that from ever happening is that they just deleted it."

The New Zealand government froze his assets, without which he had – theoretically – no access to legal representation. But the lawyers worked, at least initially, for free. And within a year, Dotcom had launched Mega, an on-the-fly cloud storage encryption site that is currently valued between $250m-$800m. He should be sitting in a US jail by now. And he should be penniless. Whatever you think of him, it's notable that neither of these things is true. He has fought back in spectacular fashion.

Dotcom speaking at a party rally this month. 'The internet generation is going to take over the world and governments should worry,' he says.

He was, he says, an easy target "because of my past and my flamboyance". After the teenage hacking conviction, there was another one for insider trading, in his 20s, also in Germany. He bought shares in an early Groupon-like site, Letsbuyit.com. After announcing he would invest heavily in it, the share price rocketed and he sold some of them. He's still bitter about it, giving me chapter and verse on what happened, and explaining what a miscarriage of justice it was, and why he should never have pleaded guilty.

Then there's his "flamboyance". Fisher's book details Megaupload's accounts. In 2010, its most profitable year, Dotcom earned $42m, "but it was going out as quickly as it was coming in". He has the receipts from his trip to Europe in 2011 in which he took not just 12 cars and 18 staff with him but also his bed and living room furniture. There are photos of him and his family posing on a white leather three-piece suite on a beach in the Med. And the man I now hear talking about social justice was, this time a year ago, complaining that one of the biggest problems with New Zealand is that there was nothing to spend his money on. It's not, even he admits, classic man-of-the-people territory. "I was such an easy sell as a villain. Look at me."

There's more, of course. There are endless pieces of circumstantial evidence and elaborately constructed theories that he rehearses for my benefit, including that he was only granted New Zealand residency in order to make it easier for the US to extradite him (he was previously living in Hong Kong, which has no extradition treaty; and he was already under investigation by the FBI, which should have precluded residency from ever being granted). That's his top theory. His second is that John Key traded him with the US for a sweetheart deal with the American studios. The day after Dotcom's residency was approved, Key met the head of Warner Brothers and brokered a deal for the three Hobbit films to be shot in New Zealand, a deal that included a change to NZ labour laws. Crucially, Key denies he knew anything about Dotcom's residency application.

"He has been treated appallingly," says Fisher. "As to whether or not it was a huge conspiracy led by the White House, I can't get there. But, then, there's been a number of things along the way that I've said to Dotcom that are completely ridiculous and which have turned out to be right, so I'm not discounting it. But they were so inept. They couldn't even get the basics right. How on earth could they pull off a conspiracy like that?"

New Zealand, as everyone tells me, is not like Britain, where on the first day of a scandal there are calls from the papers for a minister to resign and on the third day they have to go. "That would never happen here," Edwards tells me. "And the minister in question was actually the prime minister so…" It could never happen? "No. We just don't have that culture."

The result is that Dotcom, Fisher believes, is "fighting for his life. He doesn't want to do 80 years in an orange jumpsuit. He's trying to make sure that doesn't happen and, along the way, I think he has found that things that are critical to that fight run parallel to the causes of the day. I don't think there was any blinding epiphany."

Fisher probably has more insight into Dotcom's motivations than most. But there is something else going on, I think. Though it might just be my jaundiced eye, electioneering doesn't look much fun. I cruise around Queenstown in his Mercedes G class 4x4, a sort of luxury military vehicle, killing time before his next rally. There are two silent bodyguards with whom, the next day, he'll travel down to Invercargill, a town on the cold, southern edge of New Zealand. In Queenstown at least there are hotels and restaurants. Invercargill is more of a motel and take-out sort of place. He is plainly exhausted and unless I'm asking questions, there is no chit-chat. A couple of teenage girls spot the Kim.com number plate and throw themselves into the road, laughing and waving – he is a bona fide celebrity in New Zealand these days – but there is no reciprocal laughing and waving. He eyes them through the smoked glass windows and we drive on. Does that happen often? "Fairly often."

In fact, they are exactly the part of the electorate he's trying to reach: the young. This is the demographic that parties in western countries do not bother to court, because what's the point? The young don't vote. But in this election, it's looking increasingly possible that they just might. There's a big news story on the day of the Queenstown rally: the Internet party has released a campaign video that includes scenes from a packed nightclub with hundreds of people chanting: "Fuck John Key!" The furore is predictable and depressing. A leftwing blogger claims it looks like a "Munich beer hall" and the TV news interviews an expert who claims that electioneering has "sunk to a new low".

A young supporter of Dotcom's Internet party.

What they don't mention is that this is actually a quasi-revolutionary act. Interesting ordinary young people in politics is a genuinely radical new phenomenon. Somehow, the Internet party seems to be pulling off a masterful new trick: it's politics for the apolitical. And at the Christchurch event I attend, I'm impressed and cheered by the candidates. There's a 23-year-old female student from Canterbury University and a 28-year-old woman who works in IT who says she's never voted before "because before the Internet party there was no party that ever spoke to me". Then there's an older Maori woman, a Mana candidate who was the world's first transsexual MP. And finally, the party leader, Laila Harré, a trade unionist and feminist and former Green who speaks with credibility and conviction.

I've never – and I mean never – seen that many women share a political platform. And they're all so unlike regular politicians, even Harré. She tells me later how she first came across Dotcom at a debate on GCSB, the NZ external spying agency, "and I was enormously impressed by him. I'd gone along expecting someone who was a bit out there, and what I heard was somebody who had a very serious message, who was humble in an intellectual way, and that really appealed to me. He won me over with his sincerity."

Fisher tells me later that Dotcom is paying all the candidates an MP's wage while they're campaigning, which isn't exactly in the spirit of public service and is grist to the mill of rightwing bloggers such as Cameron Slater who tells me that Dotcom has "bought" various MPs. But they certainly seem genuine.

Dotcom tweets a photo of the Christchurch event. It's a full house. There's lots of energy in the auditorium and a fantastically mixed crowd. There are ageing Greens, middle-aged Maoris, teenage stoners, a white Rastafarian, a brace of indie kids, some hip-hop-type dudes and, though it takes me a while to make them out, camouflaged as they are against the ageing Greens, a good handful of actual, bona-fide hipsters. I count two full-tweed suits and a handlebar moustache. It feels like a bold new experiment in democracy; the Internet party is trying to crowd-source its policy making and you can sign up by app. But the most startling aspect of it all is that there are people who appear to be interested – in politics.

In Queenstown, it's a slightly different story. It's a Sunday night, in a conservative town. The questions are tougher, the crowd more muted. Afterwards, I question the two thirtysomething men sitting next to me. They make cynical faces. "It's a small town," one of them says. "And it's noticeable that the tech crowd isn't here. The business crowd isn't here." "For an internet party, it wasn't exactly a hi-tech presentation, was it?" says the other. But he adds: "There's a train of thought that calls New Zealand Fisher Price's First Country." What does he mean? "We're like a starter country. We're so small with such a tiny population, you can do things here you simply couldn't anywhere else. Can you imagine how much it would cost to set up a new political party in the UK, let alone the US? Forget it. You just couldn't do it. Whereas here you can genuinely experiment. In a month, you can get around the whole country and a sizable chunk of people in it."

It's a nice theory, Fisher Price's First Country. It would pave the way for the Dotcom dream: for there to be other Internet parties, other countries. And it wouldn't be the first time that a weird Kiwi disruptive practice has spread to the rest of the world: it was the first country in the world to enfranchise women. Could it lead the world again this time around? Could the internet generation really rise up and claim political power?

On the one hand, New Zealand is so far away from anywhere, an island unto itself, and on the other, the internet is the internet, and what happens in one part of it affects everywhere else. "Given the opportunity," says Fisher, "Kim Dotcom can probably achieve anything he puts his mind to. He simply doesn't countenance defeat… and the architecture of cyberspace is undergoing a massive change, a true generational change. There is a mainly younger transnational rebellion, an anger, that Assange has tapped into that also finds an alignment with Dotcom. Whether he's the person to bring it, I don't know. But inevitably, I think, there'll be something like that."

Dotcom is certainly refusing to see it any other way. The fightback has only just begun, he says. "The internet is only 20 years old. It only really took off in the last 10 years. It's all just beginning. And it's great that we now know that our data is being stored and that it can be used against us. That now will always be in the back of people's minds and it's going to drive this whole new business sector. It's going to be a cat-and-mouse game and I'm glad that everyone knows about this because we can now actually do something about it.

"We can beat the intrusions of government with innovation, with technology. We can beat them with our brains. That's what the internet is all about. They can try and do all those things but in the end we'll have the technologies to beat them."

But then, with Dotcom, I suspect that his optimism is just one more manifestation of his will. In May, his wife, Mona, and the mother of four of his five children, announced she was leaving him, a fact that he says is the "thing that I regret the most" about the whole affair and, he insists, is a direct consequence of it. He still hasn't had his assets restored. And while Mega.com is making money, he doesn't actually own any shares, they were all in Mona's name. But, as he says, he's always had a nose for the future. It's what's made his fortune, his name, everything. "And with my mind and the internet, I will always make money.

"I just understand this digital age and the internet economy better than most people. I've been born into it. Everything I saw was going to happen five years ago has now happened."

And now? "I think the war for the internet has just begun. The internet generation is going to take over and governments around the world should be worried. They are going to be voting them out. They are going to be changing the things that are wrong. And I think they are starting here in New Zealand."

Perhaps. Who knows? The only thing we can be sure of post-Snowden is that stranger things have been shown to be true.