He was educated partly in his native town, partly at Ilfeld, where he remained till 1795, when he entered the university of Göttingen, and there became the friend of Heyne, Tychsen and Heeren. Heyne's recommendation procured for him an assistant mastership in the Göttingen gymnasium in 1797. While there he published his work De pasigraphia sive scriptura universali (1799), which led to his appointment in 1803 as prorector of the gymnasium of Frankfurt, and shortly afterwards as conrector.
Grotefend was best known during his lifetime as a Latin and Italian philologist, though the attention he paid to his own language is shown by his Anfangsgründe der deutschen Poesie, published in 1815, and his foundation of a society for investigating the German tongue in 1817. In 1821 he became director of the gymnasium at Hanover, a post which he retained till his retirement in 1849. In 1823-1824 appeared his revised edition of Wenck's Latin grammar, in two volumes, followed by a smaller grammar for the use of schools in 1826; in 1835-1838 a systematic attempt to explain the fragmentary remains of the Umbrian dialect, entitled Rudimenta linguae Umbricae ex inscriptionibus antiquis enodata (in eight parts); and in 1839 a work of similar character upon Oscan (Rudimenta linguae Oscae). In the same year he published an important memoir on the coins of Bactria, under the name of Die Münzen der griechischen, parthischen und indoskythischen Könige von Baktrien und den Ländern am Indus.
He soon, however, returned to his favourite subject, and brought out a work in five parts, Zur Geographie und Geschichte von Alt-Italien (1840-1842.). Previously, in 1836, he had written a preface to Wagenfeld's translation of the spurious Sanchoniathon of Philo of Byblos, which was alleged to have been discovered in the preceding year in the Portuguese convent of Santa Maria de Merinhão.
But it was in the East rather than in the West that Grotefend did his greatest work. The cuneiform inscriptions of Persia had for some time been attracting attention in Europe; exact copies of them had been published by the elder Niebuhr, who lost his eyesight over the work; and Grotefend's friend, Tychsen of Rostock, believed that he had ascertained the characters in the column, now known to be Persian, to be alphabetic.
At this point Grotefend took the matter up. His first discovery was communicated to the Royal Society of Göttingen in 1800, and reviewed by Tychsen two years afterwards. In 1815 he gave an account of it in Heeren's work on ancient history, and in 1837 published his Neue Beiträge zur Erläuterung der persepolitanischen Keilschrift. Three years later appeared his Neue Beiträge zur Erläuterung der babylonischen Keilschrift. His discovery may be summed up as follows:
The process whereby Grotefend arrived at these conclusions is a prominent illustration of genius. A basis had been laid for the interpretation of the Persian inscriptions. What remained was to work out the results of Grotefend's discovery, a task performed by Eugène Burnouf, Christian Lassen and George Rawlinson. Interestingly, this work of genius was spurred on by a simple bet which Grotefend made with a friend at a local pub and which, needless to say, he won.