Primary sclerosing cholangitis (PSC) is a rare, immune-mediated, chronic cholestatic liver disease associated with a unique phenotype of inflammatory bowel disease that frequently manifests as pancolitis with right-sided predominance. Available data suggest a bidirectional interplay of the gut-liver axis with critical roles for the gastrointestinal microbiome and circulating bile acids (BAs) in the pathophysiology of PSC. BAs shape the gut microbiome, whereas gut microbes have the potential to alter BAs, and there are emerging data that alterations of BAs and the microbiome are not simply a consequence but the cause of PSC. Clustering of PSC in families may suggest that PSC occurs in genetically susceptible individuals. After exposure to an environmental trigger (e.g., microbial byproducts or BAs), an aberrant or exaggerated cholangiocyte-induced immune cascade occurs, ultimately leading to bile duct damage and progressive fibrosis. The pathophysiology can be conceptualized as a triad of (1) gut dysbiosis, (2) altered BA metabolism, and (3) immune-mediated biliary injury. Immune activation seems to be central to the disease process, but immunosuppression does not improve clinical outcomes or alter the natural history of PSC. Currently, orthoptic liver transplantation is the only established life-saving treatment, whereas antimicrobial therapy or fecal transplantation is an emerging therapeutic option for PSC. The beneficial effects of these microbiome-based therapies are likely mediated by a shift of the gut microbiome with favorable effects on BA metabolism. In the future, personalized approaches will allow to better target the interdependence between microbiome, immune function, and BA metabolism and potentially cure patients with PSC.