One of the major advantages of the M1 hardware is that the storage controller for the SSD is directly integrated into the CPU. You would be losing a big part of that performance advantage by using an external OS volume.
That isn't true. There wouldn't be a performance advantage to that at all (the limiting factors in storage performance have nothing to do with motherboard trace length, which has a negligible impact on performance in general), and the M1 Macs have fairly ordinary SSD performance.
