The misconception here is that iCloud does not stream
music to your device, it actually downloads
it to your device (but you can start playing it as it is downloading, at least according to Apple). The only devices that iCloud will stream to (without downloading) is a computer or Apple TV 2.
So for your 8 GB Touch, you'll have to have room on it to be able to download from iCloud, and if you don't have enough room then you have to delete items from the device first (which, as of iOS 5 can be done directly from the device). Also, once you download from iCloud, I believe the download will remain on your device until you manually delete it.
iLounge has a good write-up here:
Instant Expert: Secrets & Features of iTunes Match | iLounge Article
And Apple's page on iCloud is here (see the FAQs):
Apple - iTunes - Match