A Hangman game? Just grep is not sufficient, no. Like Jim already told you, grep can find lines in a file which match a particular pattern, but it just prints them, nothing more. In particular, it doesn't replace characters with other characters; nor does it have loops (other than the input loop for reading in the file, one line at a time, and print those lines which match the specified pattern. If you are really clever you could perhaps use that to drive something ...)

Google for "Hangman source code" or visit the "99 bottles of beer" site.