I have been vaping with organic, hydrogen peroxide bleached cotton balls from CVS straight out of the package for months now. They give off very little initial "cotton" flavor, less than some boiled yarn I used previously.
The picture in the OP has me curious though, so the next chance I get I will boil some of the cotton balls. I will also boil some water without cotton balls in it the same way, to see if the haziness is different. I wonder what it could be, if it is in fact coming out of the cotton balls. Could it just be scorched cotton particles from the edge of the pot? The hydrogen peroxide can't be causing it, and really shouldn't be harmful in trace amounts anyway.