Marine products have gained popularity due to their valuable components, especially protein, despite generating significant waste. Protein hydrolysates are widely recognized as the most effective method for transforming these low-value raw materials into high-value products. Fish protein hydrolysate (FPH), sourced from various aquatic wastes such as bones, scales, skin, and others, is rich in protein for value-added products. However, the hydrophobic peptides have limitations like an unpleasant taste and high solubility. Microencapsulation techniques provide a scientific approach to address these limitations and safeguard bioactive peptides. This review examines current research on FPH production methods and their antioxidant and antibacterial activities. Enzymatic hydrolysis using commercial enzymes is identified as the optimal method, and the antioxidant and antibacterial properties of FPH are substantiated. Microencapsulation using nanoliposomes effectively extends the inhibitory activity and enhances antioxidant and antibacterial capacities. Nevertheless, more research is needed to mitigate the bitter taste associated with FPH and enhance sensory attributes.