Why won't my iPhone connect to another iPhone via Bluetooth?

Bluetooth does need to be on to use AirDrop but you cannot pair the devices. Pairing 2 iPhones is NOT supported.

You should be able to use AirDrop with Bluetooth on and the devices not paired.

The following from How to use AirDrop on your iPhone or iPad - Apple Support may have something that will help:

Before you begin

• Make sure that the person you're sending to is nearby and within Bluetooth and Wi-Fi range.
• Check that you and the person you're sending to have Wi-Fi and Bluetooth turned on. If either of you have Personal Hotspot on, turn it off.
• Check if the person you're sending to has their AirDrop set to receive from Contacts Only. If they do, and you're in their Contacts, they need to have your Apple ID's email address or mobile number in your contact card for AirDrop to work.
• If you're not in their Contacts, have them set their AirDrop receiving setting to Everyone in order to receive the file.

You can put your AirDrop receiving setting to Contacts Only or Receiving Off at any time to control who can see your device and send you content in AirDrop.

Bluetooth pairing an iPhone to another iPhone or to an iPad or a Mac is not supported. 

If you are attempting to use Handoff/Continuity or AirDrop, that does involve Bluetooth but the devices are NOT paired; Bluetooth just needs to be on and the devices in range of each other. The following may help with Handoff/Continuity issues: Continuity features and requirements for Apple devices - Apple Support

Also see Share files between your Mac and Bluetooth devices - Apple Support

And see the information in: Bluetooth: Why can't I pair my iPhone or … - Apple Community

What part of “Bluetooth pairing an iphone to another iphone is unsupported” was unclear?