I think you have to tell us what the bike will be used for. Are you going for a city commuter that will be locked up to a rack or pole? If so, leave it alone, ride it, and let it rust away. It would probably takes years to turn to dust.

Aesthetics are important to me and I wouldn't ride a bike or own one in this shape. Not trying to be a snob(I hope!), its just MHO. I'd rather spend more on a decent condition frame than go through the hassles of painting, touching-up or powder coating. So that said, I would likely powder coat the frame to make it presentable.