Good quality microfiber polishing cloths tend to be safer to use as far as instilling scratches into scratch-sensitive finishes like clear coats. That said, each wiping cloth, (cotton towels and microfibers), has it's place in the car care world.
For example, if I'm compounding a car, I will tend to use cotton towels to remove the residue. As I work my way through the polishing process, I switch over to microfiber polishing cloths to prevent instilling towel scratches. At the compounding step, I find the nap of a good quality towel helps to break up the compound/paint residue on the finish helping me to remove it quickly and thoroughly with less effort. I know that any towel inflicted scratches I may put in with a towel will be removed with the next process, and that's application of a cleaner/polish. After this step, I will tend to switch over to microfiber for the rest of the process.