I don't think that this option makes you server went crazy.
This is more likely the case, but as said above I can't imagine that only the power on after failure option will mess things up.
Yes and no, for example, it would be good if you have internet when the server boots back up since it checks for new packages on every boot but even if you don't have internet it will work just fine, the boot process will just take a bit longer.
Are you sure that the VMs are shutting down correctly when they receive the stop command from libvirt? However, what timeouts have you set in your settings for the VMs (and maybe also for Docker)?
What happens when you let everything run and then issue `powerdown` from an Unraid Terminal, does the Server shutdown correctly?
I'm asking again because you haven't yet answered, have you yet looked into /boot/logs if there are any Diagnostics? The server will create Diagnostics when it fails to shutdown.