Aluminum/ethanol nanofluid fuel offers high energy density, high combustion efficiency, and low pollutant emissions, making it highly promising for aerospace applications. In recent years, the fundamental combustion characteristics for aluminum/ethanol nanofluid fuel have been extensively studied. However, current experimental techniques are still difficult to reveal the micro-mechanisms ignition and combustion of aluminum/ethanol nanofluid fuel. Hence, the ignition and combustion mechanisms of aluminum/ethanol nanofluid fuel were investigated from a microscopic point of view through reactive molecular dynamics simulation. The simulation results show that the mechanisms of enhanced ethanol combustion by aluminum nanoparticles mainly consists of micro-explosion at high temperature and small particle size, chain reaction at low temperature and large particle size, melt-dispersion in the mild oxidation state and diffusive oxidation in the moderate and heavy oxidation states. In addition, the initial stage of the combustion of aluminum nanoparticles with core-shell structure in ethanol is mainly a non-homogeneous surface reaction. This work reveals the combustion characteristics and mechanisms of aluminum/ethanol nanofluid fuel from an atomic perspective, which is expected to provide insights for the exploration and application of ethanol-based nanofluid fuel in the future.