A couple of years ago, Amanda Hocking needed to raise a few hundred dollars so, in desperation, made her unpublished novel available on the Kindle. She has since sold over 1.5m books and, in the process, changed publishing forever

When historians come to write about the digital transformation currently engulfing the book-publishing world, they will almost certainly refer to Amanda Hocking, writer of paranormal fiction who in the past 18 months has emerged from obscurity to bestselling status entirely under her own self-published steam. What the historians may omit to mention is the crucial role played in her rise by those furry wide-mouthed friends, the Muppets.

To understand the vital Muppet connection we have to go back to April 2010. We find Hocking sitting in her tiny, sparsely furnished apartment in Austin, Minnesota. She is penniless and frustrated, having spent years fruitlessly trying to interest traditional publishers in her work. To make matters worse, she has just heard that an exhibition about Jim Henson, the creator of the Muppets, is coming to Chicago later that year and she can't afford to make the trip. As a huge Muppets fan, she is more than willing to drive eight hours but has no money for petrol, let alone a hotel for the night. What is she to do?

Then it comes to her. She can take one of the many novels she has written over the previous nine years, all of which have been rejected by umpteen book agents and publishing houses, and slap them up on Amazon and other digital ebook sites. Surely, she can sell a few copies to her family and friends? All she needs for the journey to Chicago is $300 (£195), and with six months to go before the Muppets exhibition opens, she's bound to make it.

"I'm going to sell books on Amazon," she announces to her housemate, Eric.

To which Eric replies: "Yeah. OK. I'll believe that when it happens."

Let's jump to October 2010. In those six months, Hocking has raised not only the $300 she needed, but an additional $20,000 selling 150,000 copies of her books. Over the past 20 months Hocking has sold 1.5m books and made $2.5m. All by her lonesome self. Not a single book agent or publishing house or sales force or marketing manager or bookshop anywhere in sight.

So let the historians take note: Amanda Hocking does get to Chicago to see the Muppets. And along the way she helps to foment a revolution in global publishing.

I've come to Austin, legendary birthplace of Spam (the canned as opposed to the digital version), to find out what this self-publishing revolution looks like in the flesh. I can report that, from the outside, it's surprisingly conventional. Hocking no longer lives in that pokey apartment, but then she's no longer a struggling would-be author. She's bought herself her own detached home, the building block of the American dream, replete with gables and extensions, its own plot of land, and a concrete ramp on which to park the car.

But step inside and convention gives way to a riot of colour. It is just before Christmas, and Hocking has decorated the house with several plastic trees bedecked in lights and two large Santa stockings pinned expectantly over the mantelpiece. The sofa is scattered with animals, some of the cuddly toy variety and others alive, notably Elroy the miniature schnauzer and Squeak the cat (apparently they get on very well).

She greets me at the door and, without preamble, we talk for the next two hours about her extraordinary rags-to-riches tale and what it means for the future of the book. At 27, and with only a few months in the limelight, she is patently new to the fame game. She seems nervous at first, answering my questions in short bursts and fiddling with her glasses; but gradually she relaxes as we discuss what for her has been the central passion of her life since an infant.

She was brought up in the Minnesota countryside on the outskirts of Blooming Prairie about 15 miles north of Austin. Her parents divorced when she was young, money was tight and there was no cable TV to wallow in. "So I read a lot. I would go to the library, or get books at rummage sales. I got through them so quickly I started reading adult books because they were longer. I remember my mom giving me a box set of five books to last me all summer; I devoured them all in two weeks."

By the age of seven she was reading Jaws by Peter Benchley and anything by Stephen King. Michael Crichton, JD Salinger, Shakespeare, Jane Austen, Mark Twain, Jack Kerouac, Kurt Vonnegut and many others fed an insatiable appetite.

It was a way, she now thinks, of coping with the depression that troubled her childhood. "I was always depressed growing up. There wasn't a reason for it, I just was. I was sad and morose. I cried a lot, I wrote a lot, and I read a lot; and that was how I dealt with it."

What went in had to come out. The child Hocking began telling her own stories before she could walk. She was forever inventing make-believe worlds, so much so that the counsellor to whom she was sent for depression concluded that her incessant storytelling was an aberration that had to stop. Fortunately for Hocking, and for her many fans, her parents took her side in this argument, and she was never sent back to see him.

At 12 she had already begun to describe herself as a writer and by the end of high school she estimates she had written 50 short stories and started countless novels. The first that she actually completed, Dreams I Can't Remember, was written when she was 17. She was very excited by the accomplishment, and printed it out for friends and family, as well as sending it to several publishers.

"I got rejection letters back from all of them. I don't blame them – it wasn't very good," Hocking says.

Hocking went on to develop an intimate relationship with rejection letters. She has somewhere in her new house a shoebox full of them.

Yet she would not give up. She wrote unpublished book after unpublished book. "Sometimes I'd say: 'I'm done, I'm never going to write another book,' but then a couple of months later I'd have another idea and I'd start again. This time it was bound to work."

In 2009 she went into overdrive. She was frantic to get her first book published by the time she was 26, the age Stephen King was first in print, and time was running out (she's now 27). So while holding down a day job caring for severely disabled people, for which she earned $18,000 a year, she went into a Red Bull-fuelled frenzy of writing at night, starting at 8pm and continuing until dawn. Once she got going, she could write a complete novel in just two or three weeks. By the start of 2010, she had amassed a total of 17 unpublished novels, all gathering digital dust on the desktop of her laptop.

She received her last rejection letter in February 2010. Hocking says she hasn't kept the letter, which is a crying shame because it would surely have been an invaluable piece of self-publishing memorabilia. As far as she can remember, the last "thanks-but-no-thanks" came from a literary agent in the UK. If that agent is reading this article, please don't beat yourself up about this. We all make mistakes ...

April 15 2010 should also be noted by historians of literature. On that day, Hocking made her book available to Kindle readers on Amazon's website in her bid to raise the cash for the Muppets trip. Following tips she'd gleaned from the blog of JA Konrath, an internet self-publishing pioneer, she also uploaded to Smashwords to gain access to the Nook, Sony eReader and iBook markets. It wasn't that difficult. A couple of hours of formatting, and it was done.

"I didn't have a lot of hope invested in it," she says. "I didn't think anything would come of it." How wrong she was.

Within a few days, she was selling nine copies a day of My Blood Approves, a vampire novel set in Minneapolis. By May she had posted two further books in the series, Fate and Flutter, and sold 624 copies. June saw sales rise to more than 4,000 and in July she posted Switched, her personal favourite among her novels that she wrote in barely more than a week. It brought in more than $6,000 in pure profit that month alone, and in August she quit her day job.

By January last year she was selling more than 100,000 a month. Being her own boss allowed her to set her own pricing policy – she decided to charge just 99 cents for the first book in a series, as a loss leader to attract readers, and then increase the cover price to $2.99 for each sequel. Though that's cheap compared with the $10 and upwards charged for printed books she gained a much greater proportion of the royalties. Amazon would give her 30% of all royalties for the 99-cent books, rising to 70% for the $2.99 editions – a much greater proportion than the traditional 10 or 15% that publishing houses award their authors. You don't have to be much of a mathematician to see the attraction of those figures: 70% of $2.99 is $2.09; 10% of a paperback priced at $9.99 is 99 cents. Multiply that by a million – last November Hocking entered the hallowed halls of the Kindle Million Club, with more than 1m copies sold – and you are talking megabucks.

The speed of her ascent has astonished Hocking more than anyone. She was so elated to receive her first cheque from Amazon, for $15.75, that she didn't cash it and still has it pinned up on a noticeboard above her desk. "It went from zero to 60 overnight," she says. "Everybody was buying my books and it was overwhelming."

In internet-savvy circles she has been embraced as a figurehead of the digital publishing revolution that is seen as blowing up the traditional book world – or "legacy publishing" as its detractors call it – and replacing it with the ebook, where direct contact between author and reader, free of the mediation of agent and publishing house, is but a few clicks away. There is certainly something to that argument. The arrival of Hocking onto the Kindle bestseller lists in barely over a year is symptomatic of a profound shift in the book world that has happened contiguously. Her rise has occurred at precisely the moment that self-publishing itself turned from poor second cousin of the printed book into a serious multi-million dollar industry. Two years ago self-publishing was itself denigrated as "vanity publishing" – the last resort of the talentless. Not any more.

A survey carried out last year by the book blog Novelr found that of the top 25 bestselling indie authors on Kindle, only six had ever previously enjoyed print deals with major book publishers. With ebook sales reaching $878m in the US in 2010, an almost fourfold increase from the year before, some 30 authors have already sold more than 100,000 copies through Kindle's self-publishing site. That's the kind of statistic that made Penguin's chief executive, John Makinson, say recently that he saw "dark clouds" gathering in 2012.

But Hocking's new-found stature as self-publishing vanguardista is not something she welcomes. "People built me up as a two-dimensional icon for something I was not. Self-publishing is great, but I don't want to be an icon for it, or anything else. I would rather people talk about the books than how I publish them."

She also resents how her abrupt success has been interpreted as a sign that digital self-publishing is a new way to get rich quick. Sure, Hocking has got rich, quickly. But what about the nine years before she began posting her books when she wrote 17 novels and had every one rejected? And what about the hours and hours that she's spent since April 2010 dealing with technical glitches on Kindle, creating her own book covers, editing her own copy, writing a blog, going on Twitter and Facebook to spread the word, responding to emails and tweets from her army of readers? Just the editing process alone has been a source of deep frustration, because although she has employed own freelance editors and invited her readers to alert her to spelling and grammatical errors, she thinks her ebooks are riddled with mistakes. "It drove me nuts, because I tried really hard to get things right and I just couldn't. It's exhausting, and hard to do. And it starts to wear on you emotionally. I know that sounds weird and whiny, but it's true."

In the end, Hocking became so burned out by the stress of solo publishing that she has turned for help to the same traditional book world that previously rejected her and which she was seen as attacking. For $2.1m, she has signed up with St Martin's Press in the US and Pan Macmillan in the UK to publish her next tranche of books. The deal kicks off this month with a paperback version of Switched. It's a fast-paced romance featuring changeling trolls called Trylle who are switched at birth with human babies. The novel cannot be classed as literary, but then it makes no pretensions to be so. It is precision-targeted at a young-adult audience, and is surprisingly addictive. Once the Trylle trilogy is out, Hocking's new series of four novels, Watersong, revolving around two sisters who get caught up with sirens, will be released from August in hardback and ebook simultaneously.

Hocking's editors on both sides of the Atlantic point to the deal as evidence that traditional and solo digital publishing can live in harmony. "There's a lot of talk about publishers being left out of the loop," says Jeremy Trevathan, Macmillan's fiction editor. "But this whole thing is an opportunity for writers and publishers to find each other." Or as Matthew Shear, publisher of St Martin's Press, puts it: "It's always been the same since the days when people self-published from the back of their car – cream will rise to the top."

There's something peculiar about all this: one of the leading figures in the self-publishing revolution is now being vaunted by major book houses in London and New York as evidence that traditional publishing is alive and kicking. Hocking is very aware of the paradox, which she observes with a wry writer's eye. "A lot of people are saying publishing is dead," she says. "I never did, and I don't think it is. And they want to use me to show it isn't."

Switched, the first in the Trylle Series by Amanda Hocking, is out now in paperback and ebook formats, featuring previously unseen extra material. Published by Pan Macmillan in the UK and St. Martin's Griffin in the USA. For further information, see www.worldofamandahocking.com.

Some of the other Kindle Million Club members

Stephen Leather

Widely hailed as Britain's most successful "independent" writer, two years ago Leather took three novellas that had been turned down by Hodder & Stoughton and issued them for the Kindle through Amazon. Last year, he put his monthly income from ebooks at around £11,000.

Joe Konrath

The Chicago-based author is both prolific – he has written seven thrillers, a horror series, and a sci-fi novel, each under a different pseudonym – and candid about the benefits of self-publishing. "One hundred grand – that's how much I've made on Amazon in the last three weeks," he boasted on his blog last month.

HP Mallory

The "urban fantasy and paranormal romance" author sold around 70,000 copies of her ebooks in two months last year, and signed a three-book contract with traditional publisher Random House. She sums up her appeal thus: "If you're all about fairies and witches and vampires (oh my!) … and you like men who get a little hairy during a full moon, I got the goods."

John Locke

Last summer, the one-time insurance salesman from Kentucky became the first self-published author to sell 1m Kindle ebooks. Alongside his lurid thrillers fans can download an advice book entitled How I Sold 1 Million eBooks in 5 Months!.

Oliver Pötzsch

German novelist and film-maker Pötzsch has reached the highest echelons of the Kindle bestsellers list with the English translation of his historical novel The Hangman's Daughter. It's a big success story for AmazonCrossing, which identifies books selling well in other languages, and republishes them in English. Laura Barnett