Should it be done? I hear that most of the problems is with getting the heat treating right, if you do would it be worth it? Is it worth it even for just practice work? A friend of mine claimed that the forging and heat treating of it would cure any possible damage within the steel, but I kinda doubt it, is it legit?
Should mystery steel ever be used?

Why not try it? The only reasons I can think of for not using the steel would be if:
1) The knife was to be sold to a customer who had specified the use of a particular steel on comissioning the piece (obviously that is dishonest)
2) The knife would be used hard and someone's life might depend on it (eg. it would be used by a mountain climber, sailor, soldier, etc). And even then, if it were tested rigorously for sturydiness, edge-keeping and other vital properties, it would possibly be acceptable. I still don't know what steel my first self-made knife is made of, but I still have it despite decades of abuse.

Remember that knife makers in earlier centuries did not have access to steel of the uniformity and purity which we had today, yet they were able to make acceptable or even good quality tools and weapons with what was available to them.

Edit:
You should do some simple tests on the steel (like the grinder spark test, flexing it and checking hardness with a file, etc) to get a better idea of its properties before starting to make a knife out of it; if it becomes obvious that it is mild steel or something similar, then it will save you wasting some effort to make something which will probably be useless except as a letter opener or piece of art (and perhaps for practise). If you suspect there are cracks inside the steel (eg. an old broken car leaf spring) then I'm told you should do some of the forging at forge-welding heat so that they are welded closed. But for a short-bladed knife this is probably less of an issue than for a sword blade.

I'm not a fan of scrapyard steel. If you're just making a test piece that's one thing, but tool steel isn't that expensive and I'd rather be sure of the quality and the grade if I'm working on a project I care about, and avoid nasty surprises. Sure historical smiths worked without the advantages of modern steel, but why make things harder on yourself to save a couple bucks?

I bought a huuuge box of old files off ebay recently and am now having fun trying to forge them. I'm getting a 35ish hit rate on suitability so for the price I paid, about $2 each, not bad. But in general, if you know what you want to make, you'll know what materials you need so making a bit blind from random stock might be a false economy