it may be a bug or a design limitation, but at least for now, on a M1 based Mac, it must be a Thunderbolt connected drive, which is generally a SSD as only SSDs can take advantage of a Thunderbolt port's top speed. USB-C connected drives are for data only. You cannot boot from one.
The information out there is a confusing mess.
While
How to start up your M1 Mac from an external drive does state "A Thunderbolt 3 drive. That’s not just one that uses the USB-C connector, but is a native USB 3.1 or 3.2 drive. Nor can you use a Type A adapter for a USB 3.0 or later drive. Success
appears to require a native Thunderbolt 3 drive.",
Booting an M1 Mac from an external disk: it is possible effectively says the
exact opposite:
"if you only have SATA SSDs which connect via USB-C rather than Thunderbolt, you
may be successful, but it
seems unlikely. Some suggest that
if your SSD isn’t Thunderbolt, try connecting it via a USB-A port, although that doesn’t help those with MacBook Air or Pro models"
How to Boot a Mac from an External Drive or Alternate Startup Disk says "This
option on boot trick works for quite literally any boot volume, whether it’s an
external USB drive of any sort, a Thunderbolt hard drive, boot DVD, CD, the Recovery partition, even in dual-boot environments with other versions of OS X, or a Linux or a Windows partition with Boot Camp,
if it’s bootable and connected to the Mac it will be visible at this boot manager."
Boot from external disk on M1 Mac in Apple's Community Center states: "In February, Big Sur 11.2 was released, so I wondered if I could create Big Sur beta 11.2 on a USB-C(named USB-C1) disk as in the previous step, and successfully create and boot.
You can now use Thunderbolt, USB-A and USB-C."
Someone else in that same thread tated "It seems at this point in time, you need "just the right drive" to get it two work. Some cases USB-C drives connected with Thunderbolt 3 cables would work but if connected with USB-C cables they wouldn't. Some cases a drive would seem to boot fine only to find out later it wouldn't boot. Most of the issues I have seen had been with any USB based drive as being a toss up as to whether it would work. Thunderbolt 3 drives seem to have the highest success rate." (sic)
Pulling all that together it seems that we have something akin to the "fun" we had back in the day with multiple SCSI devices - if you didn't have them set up just so they wouldn't work correctly.