Lexie doesn't sleep with us at night, but sometimes I'll put her in the bed to snuggle before we go to sleep & she always heads under the covers & curls up against my stomach. She'd stay there all night if I'd let her. I think dogs just like those warm tight places.
I'm not sure about the breathing, but obviously they do get enough air or they wouldn't stay burrowed. That said, I also sleep with the covers over my head a lot & never have a problem breathing.
