What kind of blanket she has?
Suffocation sounds hardly possible, but if the blanket is very heavy/thick who knows. You can for sure suffocate anybody with a pillow. One other thing to keep in mind is that less oxygen and more CO2 cause sleepiness, so it can be hard to wake up. May be you heard or watched on TV about deep canyons: concentration of CO2, which is heavy, is higher there and animals and later vultures that got there fall asleep and die. Of course, before concentration of CO2 will be that high, your body gets the signal to get out. I am just wondering, if it is possible to miss this signal while sleeping, especially for a kid. Also, you right, hypoxia (lack of oxygen) affects neural tissues more then any other cells. I don't want to scare you, just some thoughts. I tried to run simple google search and did not find any blanket-related suffocation stories except for infants.
I guess if I were in your shoes I'll try to give her very light, breathable blanket, so even if she covers her head she still will be fine. If it's cold for her, maybe you could buy small heater to keep her room warmer.
I remember when I was kid, I used to cover my head with the blanket too. I survived, I think my brain is fine :). As I recall I was afraid of some monsters and I was hiding from them. It was completely dark in my room at night, so if she is also afraid of something, maybe some extra special night light can help.
She is pretty big girl, maybe you could talk to her and ask why she is doing it and also explain to her how concerned and worried you are.