Wi-Fi
Connecting to your Personal Hotspot via Wi-Fi is the default option provided by Apple, since you have to specifically accept if you also want to enable the Bluetooth connection. A Wi-Fi connection provides:
Pros
High throughput: Throughput via Wi-Fi Personal Hotspot can be of around 30 Mbps between two devices and even more.
Faster: Connecting via Wi-Fi tends to be quite faster than connecting via Bluetooth.
Cons
Might need you to reconnect every time: Wi-Fi tends to be unstable and to turn itself off every time you put your iPhone to sleep. This means that you have to take out your iPhone and re-enable the Personal Hotspot if you want to connect.
Time limit: Perhaps the biggest drawback of using a Wi-Fi Personal Hotspot with your iPhone is that in order to minimize power consumption, your iPhone only gives you a short while (90 seconds reportedly) to connect a device to it after you enable Wi-Fi Personal Hotspot. If you take longer than that, you are forced to enable the option again.
More power consumption: The Wi-Fi Personal Hotspot consumes more power than its Bluetooth counterpart, which is also part of the reason it only gives you a short while to connect a device.
A bit more complex: The iPhone’s Wi-Fi Personal Hotspot requires you to enter a password and to configure your own security options.
Bluetooth
Contrary to the Wi-Fi connection, using your Personal Hotspot via Bluetooth offers some key advantages and one huge drawback:
Pros
No time limit: Once you enable Bluetooth Personal Hotspot, there is no time limit for you to connect your device to your iPhone.
Automatic pairing: Bluetooth remains dormant and ready to connect to your devices the moment you wake them up. Additionally, Bluetooth is more power-efficient than Wi-Fi.
Security handled automatically: The security level of a Bluetooth Personal Hotspot is equivalent to Wi-Fi’s WPA2, and it is all handled transparently from the moment you connect to it.
Cons
Very limited throughput: Without a doubt the biggest drawback of using a Bluetooth Personal Hotspot is its limited throughput, which can be of just 3 Mbps at the most, making it 10 times less than what your Wi-Fi Personal Hotspot can offer.