If you could find a well cared for M50 I'd say throw a used engine in there if you plan to keep the car for a while.
Did you look at the oil pump? Not sure just a water cooling problem would do that. Seems like a lack of oil flow might've heated things up 'till they started binding causing problems which then caused coolant to enter your #4 cylinder. I'd be tempted to pull the crank & rod bearings and see it those got roasted while you've got it all apart.
But I think you need to figure out what you want to do with the car and how long do you want to keep it?
If you just want it to run for a bit then a hone & rings could get you by just fine. If you wanted to have it around for a few years a used engine might be worth looking into. If you wanted to keep it longer than a few years I might find a decent used engine and pull it apart and use the best parts from it & your blown engine to make one rather nice one.
Would also be a good time to change things up if that's your desire. Maybe add a third pedal. How 'bout an S50?
Point being this seems like a decision needs to be made based on your long term goals. And I wouldn't want to run that engine long term without knowing a little better what all got roasted and how bad was it cooked. I'd also want to give the pistons a good look at before I ran that engine.
Actually, the more I think about that the more inclined I am to say grab a used engine and at the very least give it a new HG before you slap it in...
Cosmos Black/Black 1995 540iA M-Sport
BMW Individual Exclusive Edition, 1 of 65 total, 9/25/95 Build