The Federal Bureau of Investigation is seeking to extradite them to the United States to face charges of conspiring to commit racketeering, conspiring to commit money laundering, copyright infringement, and aiding and abetting copyright infringement over the internet through the website Megaupload.
Additional charges of criminal copyright infringement and wire fraud have also since been filed by US authorities.
Dotcom's associates were earlier granted bail.
Prosecutor Anne Toohey, acting on behalf of the United States Government, had argued that because Dotcom was "a wealthy man'' he must have significant resources available to him and would be able to fund an escape from New Zealand.
However, Judge Nevin Dawson said there had been no new significant asset seizures since Dotcom's mansion was raided and he was arrested.
"The disposition that he is wealthy and must have more assets is not evidence.
"It would seem that he has every reason to stay (in New Zealand) to be with his family and to fight to keep his significant assets,'' Judge Dawson said.
Dotcom's lawyer Paul Davison QC told the court that his client should be allowed to have access to the internet while on bail, saying it was essential for him to prepare his defence with overseas lawyers.
Ms Toohey argued there was a high risk of reoffending on the internet and, given Megaupload once made up 4 per cent of the internet's content, the consequences of that could be far reaching.
She also raised concerns that Dotcom had three passports under different names, which she said made him a flight risk.
There was a black bag containing a passport next to his bed when he was arrested which would allow for a speedy exodus from the country, she submitted.
However, Judge Dawson said there was no evidence that these passports had been used illegally.
He was also of the view that if Dotcom had intended to leave the country he probably would have kept the bag with him when he fled to a safe room when police raided his property.
"One would have thought he would have kept the bag with him if that's what it was for.''
A concern was also raised about Dotcom having four bank accounts in the Philippines. However, these were found to have been empty.
Speaking outside court after the hearing today, Mr Davison said the judicial system had produced the correct decision.
"My client's proposition is that the case they've presented doesn't have any substantial basis at all and that when ... it is revealed for what it is that will be the view that prevails.''
Dotcom was "very relieved'' by the judge's decision.
"He wants to be reunited with his family. That's what he wants.''
His time in custody had not been comfortable, "but he's managed to cope with it and that's really all that needs to be said''.
He was granted bail on the condition that he does not use the internet and does not use a helicopter - Dotcom regularly flew in his personal helicopter in the skies north of Auckland.
He is to reside at his Coatesville property and is not to travel more than 80km from the property, unless it's an emergency.
Ms Toohey said the prosecution was considering appealing the decision to grant Dotcom bail.
Dotcom and his three co-accused had another hearing today in which a tentative date for the extradition hearing was set for August 20. It is expected to take three weeks.
A preliminary telephone teleconference was also scheduled for March 15.
Dotcom and his co-accused smiled at each other and shook hands as they stood together in the dock.
