You will be fine, the fact that the external DAC is 20 bit does not matter. The squeezebox does not use 8 bits for volume information, but it does start with 24 bits, which is 8 more than were on the CD you probably started with. You will lose bits when reducing the volume digitally, and some cleaver chap has worked out that you can digitally reduce the volume to 40 before reducing your signal below 16 bits. The fact that your external DAC is 20 bit, and the internal DAC is 24 bit, does not negatively change the principle.
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