I don't know the way the M2 is constructed, but I wonder if this experiment is possible - since the sensors should be the same on both ends, can you turn the setup around and reverse the plugs so the sensor that was #2 is now #1 and vice versa. That way if you still get errors but they change to E0, you know you have a faulty sensor, and you know which one it is. If you still get E1 errors, it might indicate faulty electronics.
I have never seen it necessary to paint a bullet for it to be "seen" by a chronograph. They generally work by detecting the shadow of the projectile against the bright background of the skyscreens. The color of the bullet shouldn't make any difference, but it obviously does in your case.
To answer your last question - no, coloring a bullet in the manner you are should not affect its accuracy. Of course, if you dip it in paint and let it dry, all bets are off.