It's from way back when computers only had text interfaces. A filled rectangle showed you where the next character you type would appear. And I guess they made it blink for several reasons.
It makes it easier to see. It makes it easier to tell apart from other letters and symbols. And if it is on top of an existing letter it enables you to see that letter. And I guess it's a nice call to action; see that blinking thing -> do something with it.
With time it was thinned to a line but it still shows the user where text will appear when they press a key on their keyboard. And now that it is so thin the blinking still makes it easier to see.
“Thinned to a line” makes it sound like it was an aesthetic change. The solid block means “a character will go in this spot, and if there is already something in this spot the new character will overwrite it”. And the line means “a character will go in between whatever is to the left and right of this line”. And you might switch between them for various reasons.
Cursor is Latin for 'runner'. A cursor is a name given to the transparent slide engraved with a hairline used to mark a point on a slide rule. The term was then transferred to computers through analogy
Yes , the link I provided also explains the etymology of "mouse". In short, the invention of a free moving cursor was initially called a "bug", but since the caret cursor was also called a "cat" they called it mouse. The first mouse pointers were operated by trackballs, so the physical device didn't resemble a mouse until later.
It tells you where you are, and it blinks so you can find it easily, and know it's not a character.
Imagine editing a document without it: you'd have to start typing to find out where your text is going to go. How many times have you clicked your mouse pointer at the beginning of a word, but then realized your cursor was after the first character of that word? You knew that because the cursor was blinking at you.