At the time of the Wonder Wheel's construction, Coney Island was one of the largest amusement areas in the United States. The first Ferris wheel in Coney Island was built for nearby Steeplechase Park in 1894 and was erroneously billed as "the world's largest". Several variations of the Ferris wheel were erected in the neighborhood in the 1900s and 1910s. The Wonder Wheel was unusual in that only one-third of its 24 cars were stationary, while the other two-thirds rolled on tracks within the wheel itself.

The Wonder Wheel was designed by Charles Hermann as an improvement on G.W.G. Ferris's giant wheel, and it was built for Herman J. Garms Sr. between 1918 and 1920 by the Eccentric Ferris Wheel Company. Coney Island landowner William J. Ward provided the land for the Wonder Wheel's construction. Garms, who had no formal financial experience, sold stock to family, other Coney Island business holders, and steelworkers. Hermann sold all his shares in the wheel to raise money for construction and operation. Alfred (Fred) Garms, Herman Garms's son, recalled that his father employed anyone who was willing to help erect the ride, teaching them how to construct the wheel. After the local ironworkers' union heard about the project, they attempted to force the workers to join the union. The elder Garms named all of the workers as stockholders of the Eccentric Ferris Wheel Company, preventing them from being forced to unionize.

The wheel first opened on Memorial Day in 1920. Hermann originally called it the "Dip-the-Dip", promising to combine in his new invention "the thrill of a scenic railway, the fun of a Ferris wheel, and the excitement of the Chute-the-Chutes". To help with the Wonder Wheel's upkeep, the Garms family lived under the Wonder Wheel during the summers. With the success of the Wonder Wheel, the Eccentric Ferris Wheel Company hoped to build more "wonder wheels" on the East Coast of the United States by the mid-1920s. Fred Garms worked on the ride as a ticket operator during the summer in the 1920s, when he was a child. By the time Fred had graduated high school in the early 1930s, he worked on the ride year-round, maintaining it. After the ride's construction cost had been paid off, Herman Garms bought out most of the Eccentric Ferris Wheel Company's stockholders, then reduced the size of the corporation to a small number of people.

The Wonder Wheel was damaged in a 1933 fire that also burned down several attractions nearby. The wheel was also known as the "Eccentric Ferris Wheel" before being renamed the Wonder Wheel by 1940. During World War II, the lights on the Wonder Wheel were turned off due to a blackout order affecting Coney Island. The ride set an all-time daily ridership record on July 4, 1947, when it carried 14,506 passengers. The Wonder Wheel continued to operate through the 1950s, and it recorded its ten-millionth lifetime passenger in 1952. One account from 1953 described the ride as carrying thousands of passengers, with clients coming from the South and along the East Coast. At the time, although Herman Garms still owned the ride, Fred was the manager, and there were multiple longtime employees on payroll. The New York City Department of Buildings inspected the wheel each year, as each amusement ride in Coney Island could operate only with a license that expired every March, and the licenses could not be renewed without a building inspection.

By the 1960s, Fred Garms had taken over operation of the Wonder Wheel. Coney Island started to decline during the mid-20th century, and by 1964, it had seen its lowest number of visitors in 25 years. Despite subsequent attempts to redevelop the area, the Wonder Wheel continued to operate. Furthermore, it had not had any significant incidents in its history, making it a relatively well-off ride when other Coney Island attractions were closing. To discourage crime, the wheel and surrounding attractions were protected by two German Shepherds at night: one at the wheel's base and the other on an adjacent roof; during the day, the dogs rode around in one of the Wonder Wheel's cars, where the operator provided food and water for them. Off-duty security officers were also hired to prevent confrontations with the mafia. By the 1970s, the Wonder Wheel had carried more than 20 million lifetime riders. To keep up with expenses, the Wonder Wheel raised ticket prices significantly, from $0.50 in 1976 to $1.25 by 1981.

Fred Garms was looking to sell the wheel by 1983, as he was getting older and unable to manage the wheel. Denos D. Vourderis had long been interested in buying the wheel from Garms. Vourderis was in a hospital recovering from a stabbing attack when Garms approached Deno's son Dennis on the possibility of purchasing the ride. On June 7, 1983, Vourderis bought the Wonder Wheel from Garms and his cousin Walter Kerner Sr., and it became "Deno's Wonder Wheel". The New York Times wrote that the only maintenance instructions given to the Vourderis family were the words "Good Luck" scribbled on a cardboard cigarette box. The ride cost Vourderis $250,000. He stated that part of the wheel's allure had come from when he had proposed to his future wife Lula atop the wheel 36 years prior to the purchase: he had promised to give the wheel to his wife as a future gift.

The Vourderis family restored the Wonder Wheel and made it the central attraction of Deno's Wonder Wheel Amusement Park, which Denos had acquired in 1980. They spent $250,000 to restore the wheel. Vourderis planned to begin allowing couples to host weddings on the ride, and he also rented it out for film shoots. He had paid off the ride's cost by 1985, and a 65th-anniversary celebration for the ride was hosted the same year. Vourderis acquired the land for $150,000 in 1987, and the New York City Landmarks Preservation Commission (LPC) first considered designating the ride as a city landmark in July of that year. Although Vourderis initially supported the designation when it was proposed, Newsday said he became "angry at the city" after learning that the designation would force him to ask the city for permission to repair the ride. Following public hearings in May 1989, the LPC formally designated the ride as a landmark that year.

By the early 1990s, the Wonder Wheel had offered free advertising space to the McDonald's fast-food chain, which had two franchises near the wheel. Fearing that the distinctive McDonald's logo would overshadow the Wonder Wheel itself, the LPC voted against allowing a McDonald's logo on the wheel, despite allowing Vourderis to put "Deno's" above the "Wonder Wheel" sign on the wheel's hub. Upon Deno's death in the mid-1990s, control of the wheel and the amusement park passed to Dennis Vourderis.

In the 2000s, Deno's grandchildren also became involved in the operation of the wheel. Despite the redevelopment of Coney Island and the erection of the nearby Luna Park in 2010, the wheel and associated amusement park continued to operate. The Wonder Wheel received a new solar-powered lighting system in 2012, replacing a lighting system that had been broken for three decades. Even during the aftermath of 2012's Hurricane Sandy, when Deno's Amusement Park was flooded, the Wonder Wheel was only slightly damaged and reopened the next year. The Vourderis family had planned to celebrate the Wonder Wheel's centenary with a three-day celebration in May 2020, but this was postponed due to the COVID-19 pandemic in New York City, which shuttered all businesses deemed non-essential. The 2020 season was the first in which the Wonder Wheel did not operate at all; the Wonder Wheel ultimately reopened in April 2021. The centennial celebration was rescheduled for after the 2021 reopening.

As of 2024, the Wonder Wheel is the oldest continuous operating ride at Coney Island, and Dennis Vourderis and his brother Steve continue to operate the Wonder Wheel and the amusement park. Deno's Wonder Wheel Amusement Park is the last family-operated amusement park in Coney Island, Though several developers have made offers for the amusement park and wheel, the Vourderis family has refused to sell.