It's probably not a good idea to use an iPod this way.
You'll note that Apple says booting is an "unsupported feature." This means, of course, that Apple's warranty won't cover you if you burn it out. And I remember reading somewhere that someone had tried using an iPod as an OS X Server boot drive, and they burned theirs out. From the little I understand about this, the problem is that the iPod's tiny hard drive is designed to power up, be used for a short period of time, then power down. The iPod case doesn't have room for a lot of heat dissipation. I believe the heat buildup from using the HD for an extended period could cause the drive to fail. So, the iPod is great to move files around. Hook it up, copy them over, then disconnect. It's really not designed to run for days (or weeks) at a time, like a normal 2.5" HD.