Space may be at a premium on PlayStation 5, but you won't be able to rely on an external drive in order to store your PS5 games. While it was expected that you would need PS5 games to be installed to the internal NVMe SSD in order to play them, you can't even temporarily store them on an external drive to free up space on the internal drive.
The unfortunate news puts Sony's new console at odds with Xbox Series X and Series S, both of which allow you to store next-gen games on an external drive and then move them to internal storage when you're ready to play them. In theory, this should save you from having to delete and re-download digital games, which is a concern for people with internet data caps. That won't be possible on PS5, at least at launch.
One thing you can do to ensure you have space on the PS5's internal drive is store your backwards-compatible PS4 games on an external drive. These games can be played from an external hard drive, although the speed of the device will likely impact the improvements you see to load times.
PS5 features an option in the Storage menu to always have your PS4 games install to extended storage, sparing you from downloading them to the internal drive and then moving them. However, this is an all-or-nothing option, as you won't be able to decide where games download on a case-by-case basis. That means you may end up needing to move games around after they download, depending on which drive you want to play them from.
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