OK, found the solution on 'WayDroid on Ubuntu Touch' Telegram group channel
Thanks "aleasto" for sharing this solution.
Start WayDroid session (by either taping "WayDroid" in launcher or waydroid session start in terminal)
When WayDroid session loads, open Terminal on Ubuntu Touch
Run the following commands (I think the first prop should be fine, but just in case, I set those 2 props)
$ waydroid prop set persist.waydroid.cursor_on_subsurface true
$ waydroid prop set persist.waydroid.cursor_force_shm true
Restart the WayDroid session to apply prop changes. (By either tapping "Waydroid Stop" then "Waydroid" in launcher or waydroid session stop then waydroid session start in terminal)
And from now, hovering mouse cursor to Waydroid window will no longer crashes the Waydroid window.
And enabling Show taps on developer options no longer crashes Waydroid window but the taps no longer shows when touches.