hiya.. i thought i'd add in my 2 cents.
you surely can sell recycled yarn.. quite a few people do it..
i used to! recycled yarn is mainly where i got my start dyeing yarns..that and lion brand fishermans wool..
selling yarn and on etsy can be a tricky thing.. i'm not sure of the market for recycled yarns at the moment since i haven't "made" any to sell in quite a while.
if you want to turn it into a more than a hobby.. have the time for unravelling, dyeing, possibly re-skeining, picture taking, label making, etc.. then i don't see the harm in giving it a go
if you want to keep it more casual.. then i prob wouldn't bother trying to sell it as it may get lost in the shuffle
and thats okay since you can get quite a bit of satisfaction from knitting something in your own hand dyes
the best advice i can give though is to search etsy to get a feel for recycled yarns sold there and then go with your instincts