That dialogue glitch was interesting. I think either the there are limits to dialogue with what now would appear to be digital constructs (which puts into question the reality of the human side of the setting as a whole, knowing the monsters can exit portals), or the system is limiting the knowledge available for the player at this stage.
It's the latter. The system can alter what he sees/experiences and does not want him to know what is going on yet as it's too early. Part of why he can understand and speak Ice Elvish. His compatriots would not have seen the glitch and could know the truth if they understood the language. The monsters are real. He is not in a simulation.