Severe bone damage from diseases, including extensive trauma, fractures, and bone tumors, cannot self-heal, while traditional surgical treatment may bring side effects such as infection, inflammation, and pain. As a new biomaterial with controllable mechanical properties and biocompatibility, hydrogel is widely used in bone tissue engineering (BTE) as a scaffold for growth factor transport and cell adhesion. In order to make hydrogel more suitable for the local treatment of bone diseases, hydrogel preparation methods should be combined with synthetic materials with excellent properties and advanced technologies in different fields to better control drug release in time and orientation. It is necessary to establish a complete method to evaluate the hydrogel’s properties and biocompatibility with the human body. Moreover, establishment of standard animal models of bone defects helps in studying the therapeutic effect of hydrogels on bone repair, as well as to evaluate the safety and suitability of hydrogels. Thus, this review aims to systematically summarize current studies of hydrogels in BTE, including the mechanisms for promoting bone synthesis, design, and preparation; characterization and evaluation methods; as well as to explore future applications of hydrogels in BTE.