Hi,
How hot is too hot? It depends on the steel. Most knife steels will lose some hardness if the heat generated during machining is more than you can touch. And yes, sharpening is a machining process. A few, like HSS and to a lesser extent, D2, (a hot work die steel), are able to hold their temper at much higher temps. HSS will hold it's edge and temper to a red heat. That's why it was developed to make cutting tools for lathes and mills. As a side note, T-series alloys will hold an edge and temper to 5000F to 6000F.
Keeping material cool during machining can be achieved several different ways. First, if you do the process slow enough, (rubbing your knife on a rock by hand), you won't create enough friction fast enough to build damaging heat. Things get a little more complicated when we switch to powered grinding. There are a couple things we can do to beat the heat. We can run a coolant to carry the heat away, either a fluid or air. But that tends to be messy at home. Or we can machine fast enough to have the heat carried off by the swarf. Those sparks that you see coming off your knife edge UCOK, are actually a good thing. That is where most of the heat is. But notice I said, MOST, but not all. Some heat is left behind. And with the very thin section that makes up a knife edge, there isn't a lot of mass to absorb much heat. And the tools generally available to home knife guys mostly can't remove stock fast enough to be totally "safe" to the edge to sharpen dry. In manufacturing, I would combine these two processes, coolant and high speed stock removal to give the edge every chance.
dalee