I'll try to explain a bit better.
Instant Hotspot is a new feature. "Manual Hotspot" is just a term I used for the other method of enabling personal hotspot "manually" on your iPhone.
With Instant Hotspot, after everything is setup correctly, you can have a device trigger your iPhone to enable WiFi and to connect to it. All without touching the iPhone. This requires the same iCloud account on both devices.
With Manual Hotspot, you go to the iPhone and enable Personal Hotspot. Then you go to another device, find the WiFi being broadcast by your iPhone and connect to it.
One method is more automatic and the other is more "manual".
The way you know which method you are using is by looking at available WiFi networks on your device. Here is an image I found on google. It is a screen shot of how this looks on Mac OS X.

Notice the line between the "Personal Hotspot" section and the regular WiFi networks? Your iPad appeared to have the same line. Options in the upper "Personal Hotspot" section are Instant Hotspot options. Your phone could really be in one or the other, depending on your setup, but I believe it defaults to showing in the Personal Hotspot section if Instant Hotspot is an option.
I hope this explanation helps you see the difference between Instant Hotspot and what I refer to as Manual Hotspot, or setting your hotspot manually.
As for bluetooth, it's required because that is how the devices "discover" each other to know they are within range. They don't actually pair or need to pair. What other way would they know they are by each other to create an instant hotspot? I think it's pretty cool. I believe AppleTVs now work the same with bluetooth discovery.
In regards to the WiFi disabling itself after you leave the Personal Hotspot screen even though the setting still says "enabled", I understand that when you want it to work the way you do, that it seems broken and silly that they do that. However, if Apple did leave your Personal Hotspot enabled all the time, even when you're not using it, then others (and possibly you) might complain that it drains the battery and poses a security risk.
So perhaps the solution is for Apple to flip the setting to disabled if they are going to disable it for you automatically. But still, someone would complain that Apple shouldn't be deciding when the WiFi gets disabled. But for 95% of people that don't understand much or any of this, it's probably a good thing that Apple disables the WiFi after it's not being used for a minute.