Yes, but there are some issues. For pure macOS development it's usually fine, but anything touching the simulator breaks if multiple versions of Xcode try to use it at the same time. I quickly got in the habit of always exiting Xcode before starting a different version.
It changes a symlink at /var/db/xcode_select_link, and all of the development tool stubs that Apple has placed consult this to see which binary to run. This is pretty much the officially supported way to switch between multiple copies of Xcode.
The macOS EULA explicitly allows macOS to be virtualized if you do it on a Mac running macOS.
> It would be really nice to have say the current xcode in one container and a dev xcode in another.
This is the entire point behind xcode-select. I currently have Xcode-beta and Xcode on side-by-side on my machine, and they pretty much coexist.