Liquid crystals (LCs) are well known for inherent responsiveness to external stimuli, such as light, thermal, magnetic, and electric fields. Cholesteric LCs are among the most fascinating, since they possess distinctive optical properties due to the helical molecular orientation. However, the good flow, easy contamination, and poor stability of small‐molecule LCs limit their further applications, and microencapsulation as one of the most effective tools can evade these disadvantages. Microencapsulation can offer shell‐core structure with LCs in the core can strengthen their stability, avoiding interference with the environment while maintaining the stimuli‐responsiveness and optical properties. Here, we report recent progress in the fabrication and applications of cholesteric LC microcapsules (CLCMCs). We summarize general properties and basic principles, fabrication methods including interfacial polymerization, in‐situ polymerization, complex coacervation, solvent evaporation, microfluidic and polymerization of reactive mesogens, and then give a comprehensive overview of their applications in various popular domains, including smart fabrics, smart sensor, smart displays, anti‐counterfeiting, information encryption, biomedicine and actuators. Finally, we discuss the currently facing challenges and the potential development directions in this field.