The iMacs range from supporting EIDE ATA-3 to Ultra ATA as noted in EveryMac.com under the "Int. HD Interface:" section for each iMac, but the good news is that they are all backwards compatible.
Fortunately, the technology itself is pretty easy to use, even if the labels given to it often stink. So one useful way of dealing with all the standards and labels is simply to ignore them! Look past the hype, and focus on what the drive's actual capabilities are. If you want to really understand what a drive can do and what it supports, you should look at its specification sheet and see what features and transfer modes it is designed to use. Ignore labels like "EIDE" or "Ultra ATA/whatever" and find out what modes and functions the drive supports. Getting the real scoop on the drive means you don't need to worry about the pretty stickers slapped all over the box, or whatever the manufacturer is trying to claim.
One thing you need to be aware of is the 128GB size limitation. Your iMacs IDE controller can not address more than 128GB of a given disk.
Also overheating issue is probably not an issue? Eg if you go though OWC's MyOWC upgrade guide for any of the G3 iMacs even the oldest, they are recommending a 120GB 7200RPM drive as a replacement. The best way to be sure would be to figure out the power requirement specs for that original drive and see how they match up, and use that to pick a new one.
Also there is some discussion on newer 7200 RPM drives producing less heat than the early on 7200RPM drives 7200 rpm Drive Doesn't Overheat My G3 iMac
Three or four years ago I installed a 7200 RPM hard drive in a 500 MHz G3 iMac (Summer 2000). I lent it to a friend, who ran it round the clock for weeks on end. Never had heat issues. It runs Tiger well enough for basic Internet, email, word processing, and old versions of iTunes and iPhoto. A fast hard drive and 1 GB of RAM really did a lot for it. The drive is an 80 GB Samsung. It is out of production, but Western Digital still makes 3.5" ATA-100 hard drives. Any modern one-platter hard drive will probably run cooler than the iMac's original hard drive.
I put a 120 GB 7200 rpm Seagate hard drive in my 600 MHz iMac and ran it 24 hours a day for years with no overheating. One time I left home for two weeks during September in Texas with the air conditioning off the entire time while I was away. There was a hot spell while I was gone. When I got home the house, was 95 degrees. I'm sure it got hotter than that while I was gone. The little iMac ran perfectly the entire time.
Today's 7200 rpm hard drives have better bearings, use less energy, make less noise, last longer, and make less heat that the old, slow hard drives that came with the G3 iMac. I say put a 7200 rpm hard drive in it and don't worry about it. Expect to see a small performance increase as a result.
In the end I went with the most expensive but also the fastest option: #1 which was the Mercury Accelsior PCIe based SSD hardware RAID array (RAID 0 by default which I will keep) in a Mercury Helios Thunderbolt PCIe chassis. The main reason was because it was the only one that mentioned it was bootable (and made a big deal out of that fact).
I paid $799 for the 240 GB model (it's 128 GB X 2 minus the unusable amount...a nice touch for the seller not to count that). It's got a lot of technology built into the card including processors and cache etc. to monitor and control the hardware RAID array including extra error checking and load leveling/balancing. Also it's theoretically upgradable (each drive is called a "blade" and while they don't yet sell independent blades they may in the future). Also the PCIe chassis is an extra bit of the investment that could live beyond the SSD, just like the whole arrangement could live beyond the use of my iMac itself.
This is a great review on it where they say it's "really fast. Ridiculously fast."
A guy on youtube has a (somewhat boring) video of his Mac Pro taking 3 minutes to boot and launch paint shop pro with his hard drive and then after setting up one of these it cut down to 15 seconds! Crazy balls out fast.
This is the sellers sites for;
Of note is that if they didn't offer the bundle discount and if it were not so much more expensive I might have opted for this much more attractive chassis.
Or for even more and larger chassis with multiple slots and supporting larger sized cards.
These chassis got me thinking about the possibilities with thunderbolt. Now any iMac or MacBook can be as capable and expandable as a Mac Pro...there are even developments with video cards in one of these things! I do wonder if it would be possible to take a MacBook Air and hook up a thunderbolt PCIe chassis with a high end graphics card with the display on the internal monitor?
If I was one of these manufacturers, or even Apple, I would consider making a full on chassis with PCIe slots and storage areas, etc. I really wanted a Mac Pro but they were so old...now I can get some of that goodness piecemeal, though for a price. :-)
I get the device about a week from now and will post back my impressions if anyone is interested.
Best Answer
Yes, it's totally fine to install and run macOS on an external HDD/SSD.
Especially since USB 3 you can get the same speed as the internal drive – or even faster in the case of an SSD.
The only downside is the fact that you will have one USB-port permanently occupied. It may also not be as pleasing to one's eye if there's an external drive permanently attached.
Enjoy your new iMac!