I like the envelope method (#2) because binding something as small as a potholder is a pain in the butt. You can quilt just the top and the batting before you put on the backing and flip it. Once it's flipped, stitch around the entire edge 3/8" to 1/2" in to secure everything and you're all set.
ETA: I think potholders without binding stay cleaner longer. Binding edges trap grunge.