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I don't know what to tell you exactly except that external drives work fine on Steam. I've always run them for 13 years.
And how much space are we talking about?
Valve recommends you don't go over more than about 90% full on any install drive, and you NEED to allow up to about three times the install space because of how games download on Steam.
So if you have a game that's 10GB, you need to allow around 30GB at least free.