He said he had no doubt that Dotcom could flee New Zealand if he wanted to because he has access to forged travel documents and money.
"The real question though on the bail application is whether there is any incentive to flee the jurisdiction.''
Judge McNaughton said if he was able to flee to Germany, he would be safe from extradition because Germany does not have an extradition agreement with the US.
He said Dotcom was a real flight risk with passports and bank accounts in different names.
Dotcom "emphatically'' denies that he was involved in a "mega conspiracy'' and the alleged largest intellectual property loss in the United States to date.
His alleged co-offenders, Bram van der Kolk, 29, Finn Batato, 38, and Mathias Ortmann, 40, had their bail hearings this afternoon.
The lawyer representing the three men, Guy Foley, said the men did not have access to the same amounts of money as Dotcom, did not have similar life-styles and had not been caught with firearms.
"This is likely to be a fierce battle over copyright issues - it is not an open and shut case by any means. If these men are on the right side of the line then the destruction of their business will certainly be a tragedy.
"If they are on the wrong side of the line then they will pay a price. In my submission, more than lip service should be given to the presumption of innocence.''
He said Batato would live by any conditions that were set by the court.
"He is not a big player but a fair player.''
Mr Foley said Batato could not start the business up again because he was a marketing man and had not been employed in the technical side of the business.
"He emphatically denies knowledge of or involvement in the conspiracy to breach copyright.''
Crown prosecutor Anne Toohey said Batato was a flight risk and there was a possibility he could re-offend while out on bail.
She said Batato was a German citizen so, like Dotcom, he could escape extradition if he fled back to Germany illegaly.
She said Batato, who has a 2.5 percent share in Megaupload, had only come to New Zealand to celebrate Dotcom's birthday.
Addressing van der Kolk's application for bail, Ms Toohey said he was the chief programmer.
Foley said van der Kolk's wife and child were here in New Zealand so he would not flee the country.
He said it was "troubling'' that the FBI, who had prepared the evidence relied on by the Crown, had put the wrong photograph on his file.
In Ortmann's case, Mr Foley said he had a 25 percent stake in Megaupload and had earned $20m since 2005.
But he said Ortmann was described by friends as "decent, modest honest and reliable.''
"He wont flee - he's not that sort of man.''
Ms Toohey said the US had probably not seized all of Ortmann's money and said, according to the FBI, he may draw on overseas relatives to help to get him out of New Zealand.
She said he too is a German national, so would escape extradition if he made it to his homeland.
Judge McNaughton will deliver his decision on whether or not the trio get bail tomorrow afternoon.
