You can not encrypt the bitstreams for a cyclone II. You have to go to some of the Stratix series and Arria II GX series to get the encryption. In general i believe a bitstream file is worthless if you are trying to get the code out of it, but useful if someone were looking to copy your hardware and then run your software(fpga file) on it. Technically you could retreive a functional diagram of the whole IC from the bitstream, if you knew the format of the bitstream that is, which i believe is propriatary, but it would be hard to do anyhting with that. That being said, there are other things you can do to make the knowlege of a bitstream file worthless if someone were to copy your hardware and steal your bitstream.
Some links that may be helpful:
http://www.altera.com/support/refdesigns/sys-sol/indust_mil/ref-des-secur.html?gsa_pos=1&wt.oss_r=1&wt.oss=design%20security http://www.altera.com/products/devices/stratix-fpgas/stratix-ii/stratix-ii/features/security/st2-security.html