Developing accurate, clinically convenient, and non-invasive methods for early cancer detection, monitoring, and prognosis assessment is essential for improving patient survival rates, enhancing quality of life, and reducing the socioeconomic burden associated with cancer. This goal is critical in precision oncology. Genetic and epigenetic alterations in circulating cell-free DNA (cfDNA) have emerged as transformative tools for advancing early cancer detection, monitoring, and improving patient outcomes. Among these, 5-hydroxymethylcytosine (5hmC) modifications in circulating cfDNA stand out as promising epigenetic markers, offering insights into cancer initiation, progression, metastasis, and prognosis across various cancer types, such as lung cancer, colorectal cancer, and hepatocellular carcinoma. This review comprehensively explores the biology and sequencing methodologies of 5hmC, emphasizing their potential in cancer screening, diagnosis, treatment monitoring, and prognostic assessment. It highlights recent advancements in cfDNA-derived 5hmC signatures' applications, addressing their strengths and limitations in the context of clinical translation. Furthermore, this review outlines key challenges and future directions for integrating 5hmC modifications in cfDNA into routine clinical practice, facilitating personalized and non-invasive cancer management.