On your motherboard there is a bluetooth radio. That is what is being turned off and on by turning bluetooth off and on.

The USB receiver is likely not bluetooth but a 2.4GHz radio for connecting to the mouse.

Your mouse may also be able to connect via Bluetooth without the USB dongle, some mice can do that, but most just use their dongle.

Bluetooth is not great for low latency things like mouse input or game controllers. It also kind of sucks for audio but that is handled mostly by just buffering audio and having a slight delay in playback. That said, I love Bluetooth because I can have headphones without cables that get snagged all the time. Very handy.