Believe it or not there are many of us who couldn't fit our entire CD collection onto even a 40 GB iPod. I imagine most people around here don't trade live music, but I own maybe 300 3 disc shows, maybe more, not to mention another 250 albums, and another 100 or so official live releases. My collection is always growing, as just today I added another 9 discs to it. If I encoded at 192 kbps or higher I'd say that I'm looking at about 50-60 GB, although it's hard to estimate that. Certainly if you just take a look at the number of CD's I have, the 40 GB should hold 800 cd's (each cd with about 10 songs), while I have cd's full to the brim of 80 minutes and about 1250 cd's. That'd be about 1.5x the capacity of a 40 GB iPod.
Do I or does anyone else really need that much disk space for music? Probably not. The only thing I would say about that is that if I'm on the road for a significant part of the summer, it would be nice to have my entire catalog with me all times, use it in my car, and not ever worry about my cd's being stolen. I would also probably use it to store data as well, just general stuff I don't want on my computer, need to carry with me, etc...
I think it'd surprise you how much you could get out of a 40 GB iPod. If you have the space, sooner or later you'll fill it up.