Ethanol (EtOH) is a recreationally ingested compound that is both teratogenic and carcinogenic in humans. Because of its abundant consumption worldwide and the vital role of stem cells in the formation of birth defects and cancers, delineating the effects of EtOH on stem cell function is currently an active and urgent pursuit of scientific investigation to explicate some of the mechanisms contributing to EtOH toxicity. Stem cells represent a primordial, undifferentiated phase of development; thus encroachment on normal physiologic processes of differentiation into terminal lineages by EtOH can greatly alter the function of progenitors and terminally differentiated cells, leading to pathological consequences that manifest as fetal alcohol spectrum disorders and cancers. In this review we explore the disruptive role of EtOH in differentiation of stem cells. Our primary objective is to elucidate the mechanisms by which EtOH alters differentiation-related gene expression and lineage specifications, thus modifying stem cells to promote pathological outcomes. We additionally review the effects of a reactive metabolite of EtOH, acetaldehyde (AcH), in causing both differentiation defects in stem cells as well as genomic damage that incites cellular aging and carcinogenesis.