Optimization of lanthanide-doped luminescent nanoparticles for use in nanomedicine has encountered some difficulties due to the specific properties of water as a solvent. In this review, the current challenges for the adaptation of lanthanide-doped luminescent nanoparticles to aqueous environments, and promising strategies to optimize their colloidal dispersibility and stability in water and physiological buffers, are summarized. Moreover, the possible luminescence de-excitation paths caused by water molecule vibrations and how they can be prevented under different measurement conditions are discussed. This review also deals with the latest developments in lanthanide-doped luminescent nanoparticle design for nanomedicine, to increase the depth at which they can be monitored, which is mainly limited by the absorption bands of water. Furthermore, the anomalous temperature dependence of water and the different effects it has on lanthanide-doped luminescent nanoparticles in the physiological temperature range are commented on. Finally, a critical opinion on the possible next steps in this field is provided.