Chondrocytes are surrounded by a lower oxygen environment than other well-vascularized tissues with higher oxygenation levels. Prolyl-hydroxyproline (Pro-Hyp), one of the final collagen-derived peptides, has been previously reported to be involved in the early stages of chondrocyte differentiation. However, whether Pro-Hyp can alter chondrocyte differentiation under physiological hypoxic conditions is still unclear. This study aimed to investigate whether Pro-Hyp affects the differentiation of ATDC5 chondrogenic cells under hypoxic conditions. The addition of Pro-Hyp resulted in an approximately 18-fold increase in the glycosaminoglycan staining area compared to the control group under hypoxic conditions. Moreover, Pro-Hyp treatment significantly upregulated the expression of SOX9, Col2a1, Aggrecan, and MMP13 in chondrocytes cultured under hypoxic conditions. These results demonstrate that Pro-Hyp strongly promotes the early differentiation of chondrocytes under physiological hypoxic conditions. Therefore, Pro-Hyp, a bioactive peptide produced during collagen metabolism, may function as a remodeling factor or extracellular matrix remodeling signal that regulates chondrocyte differentiation in hypoxic cartilage.