This is because Bluetooth _could_ be used to determine a user's location by using beacons and constantly scanning or whatever.
But this has led to nothing but endless confusion for users (and constantly gets highlighted as suspicious in online forums), so they really need to come up with better wording. Like "This app is requesting Bluetooth permissions, which _could_ be used to determine your location".
I have no idea why google bundled those together, instead of treating them as separate things alltogether.
No, they need to come up with a better way of communication that doesn't involve leaking permission.
Generally speaking, if you want wireless communication, you'll need some way of uniquely identifying each participant in the wireless space. Data aggregators can then drive around on the streets and associate device IDs with physical addresses.
A bluetooth communications setup (or future alternative) will want to be able to know what device IDs are around it. (You want to connect to your wireless toothbrush - not your neighbors). A malicious developer can then use that access to the ID list, compare it against databases of known ID locations, and get a really good guesstimate of your location.