Alginate-gelatin bicomposite hydrogels have gained prominence in biomedicine and tissue engineering for their biocompatibility, biodegradability, and customizable properties. Since one of the most promising applications of hydrogels is their use as patches for wound healing reliant to oxygen, we prepared alginate-gelatin hydrogels with constant 2% (w/v) alginate and increasing concentration of gelatin (up to 1% (w/v), crosslinked with a solution of 0.43% CaCl2 and used them to encapsulate photosynthetic cells of a unicellular alga Chlamydomonas reinhardtii. We investigated how hydrogel design parameters (crosslink density) influenced cell growth and oxygen production compared to their rheological properties. Our findings demonstrate that optimizing gelatine concentration played an important role in the diffusion of nutrients to the encapsulated cells, the most important parameter in controlling cell growth and oxygen production. We observed that modulating the concentration of gelatin molecules up to the gelation point, which was determined at 0.66% (w/v), significantly impacting nutrient diffusion, cell growth, and oxygen production due to the viscosity effect. Differently, at concentrations of GEL above gelation point (up to 1%) the stable hydrogel network is formed which affect the nutrient diffusion, cell growth, and oxygen production because of crosslink density. The effect of cell concentration on the mechanical properties of the hydrogel was investigated, which are crucial for further development of alginate-gelatin systems with targeted properties for various applications.