There is a way to solve the problem, but it is not for the faint hearted. \hyphenation is designed for minor corrections to the global rules, for specific words. You however want to change the global rules, and for that you need \patterns not \hyphenation.
\patterns may only be used at initex time when making a format and reads a patterns list that looks something like
% dehyphn-x-2012-05-30.pat
\message{German Hyphenation Patterns (Reformed Orthography, 2006) `dehyphn-x' 2012-05-30 (WL)}
% TeX-Trennmuster für die reformierte (2006) deutsche Rechtschreibung
%
%
% Copyright (C) 2007, 2008, 2009, 2011, 2012 Werner Lemberg <wl@gnu.org>
%
% This program can be redistributed and/or modified under the terms
% of the LaTeX Project Public License Distributed from CTAN
% archives in directory macros/latex/base/lppl.txt; either
% version 1 of the License, or any later version.
%
%
% The word list is available from
%
% http://repo.or.cz/w/wortliste.git?a=commit;h=7915938d035684993f8c363729f963eec71c85b1
%
% The used patgen parameters are
%
% 1 1 | 2 5 | 1 1 1
% 2 2 | 2 5 | 1 2 1
% 3 3 | 2 6 | 1 1 1
% 4 4 | 2 6 | 1 4 1
% 5 5 | 2 7 | 1 1 1
% 6 6 | 2 7 | 1 6 1
% 7 7 | 2 13 | 1 4 1
% 8 8 | 2 13 | 1 8 1
\patterns{%
.ab1a
.abi4
.ab3l
.abo2
.ab3ol
.ab1or
.ack2
.ag4n
.ag4r
...
As you may guess these things are normally constructed mechanically (traditionally using the patgen program)
The TeXBook says
...since patterns are supposed to be prepared by experts who are paid
well for their expertise....
However you want to change the hyphenation of words beginning with byte so if you change the name of the file as required by LPPL You can probably add a pattern of the form
.b4y4t4e
where . denotes the beginning of the word and the numbers between letters encourage (odd) or discourage (even) hyphenation.
Note I haven't tested this and I haven't actually used the \pattern command this millennium. But something like this would probably work.
\hyphenationcommand does not expand its arguments to longer words that contain a word defined in\hyphenation. Unfortunately I don't have any answer to your second question. – Benedikt Bauer Sep 27 '12 at 13:58\hyphenationapplies to complete words only. It is designed for English, which does not have compound words in the abundance found in German. – Andrew Swann Sep 27 '12 at 14:00patgenis used, all that is necessary is to add a couple of representative words with appropriate hyphenation points marked. david carlisle's answer gives some detailed information on what an appropriate pattern should look like. – barbara beeton Oct 13 '12 at 22:01