It seems the Terminal cursor color only accepts solid colors. Meaning it completely covers the character at insertion point, making it impossible to read.
This is happening in both Settings > Terminal > Theme > “Same as Editor” mode and also in “Custom” mode when setting a specific non-opaque cursor color. The color picker allows a transparent color to be selected, but the cursor itself remains opaque. When going back into settings, the custom cursor color reverts to fully opaque again.
Nova: 10.6 (Build 476615)
Machine: MacBook Air M2
OS: Ventura 13.3.1