Will it harm the engine to have the exterior powder coated? No, the engines will see 1,480 to 1,520 degrees inside (more than hot enough to melt the aluminum parts if it were around long enough). So baking it for a half hour at 450 degrees won't harm it. I bake all stock parts in a oven at 700 degrees over night to turn grease and grime into ash, as part of the cleaning process. (I don't use stock parts myself, but when I was building engines for others I did).
Will it insulate the block preventing heat getting out? That depends upon the color you choose. Darker colors absorb and radiate heat better than light colored objects. So I would stay away from silver ceramic coatings on an air cooled engine. Since yours is water cooled know that the lighter the color the more of a load you place on the radiator.
Also know that unless it is going back together as a stock rebuild (no big cam, no new heads, stock pistons, etc.) you need a bigger radiator anyway as the load on the radiator goes up with any increase in horse power (about a third of the heat of combustion is shed by the radiator). More power more heat, it is that simple.