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It would be a waste of money to use an iPod touch exclusively for reading; it does so many other things. But I don't think that is what you meant to ask. I think you meant to ask if anyone uses it as their only reading device.
I just got my 4th gen. iPod Touch yesterday. I don't see myself reading exclusively on it, although it is not bad. The screen is small, so one either needs to use larger text and turn pages a lot or smaller text and hold it closer to one's face.
The eye strain issue is not as bad as I thought it'd be, mostly because it has background modes: Black on white, brown on sepia, and white on black. In the white on black mode, it is not going to be much eye strain at all, because only the text emits light. There are those who insist that it is no strain at all, even with black on white, but I disagree. Between the smaller screen and the fact that it is backlit, it is just a bit more demanding on the eyes than reading a paper book or an e-ink display.
So here's what I think you should do: If you were kind of in the market for an iPod Touch because of apps, games, mobile web browsing, etc., go ahead and get one. Try out an e-reader app and make your own decision as to whether you should also buy a dedicated e-book reader.
If what you really want is an e-book reader, and the size of the device is not a problem to you, buy an e-book reader. They're just all-around better for reading.
If you feel like you won't have problem with a really good, high resolution but small screen for e-reading, and your gut is telling you to go this way, do it.
Tangent: So far, I really like the thinking games and apps, as well as being able to keep up with email at any place that has WiFi. It is really handy to carry around for those times when I'm stuck waiting for something. I can play a game of chess, Boggle, Tetris, etc. I'm a mobile gamer since 1987, when I got my first Game Boy. I'm perfectly willing to settle for less processing power for portability. The jury is still out on some types of games. For instance, I bought Dungeon Hunter and the motion control is just not as good as it would be with a dedicated control pad. But for games that are not so fast-paced, and demanding of precision movements, it is really good. To me, the other stuff is just icing on the cake. I don't have a big need for low quality photos or HD videos taken through a poor lens on a poor sensor. Of course the music player is awesome, as is the ability to watch movies & shows.
So even though (in my opinion) it is inferior as an e-book reader, it may be the better choice overall.
Some folks like to point out that it is easier to read in the dark on an iPad/iPod Touch. That is true. I have an LED headlamp that I keep on my nightstand, and it is the perfect accessory for reading. I just leave it.
Another way to look at it is how long do you read at a sitting? For reading up to 30-45 minutes at a time, there's probably no real advantage to having a dedicated e-book reader. (battery life aside)
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