That's only if you point the cloud at the directory with the files. For example, if your ~/Documents is on iCloud, it'll happily remove the copy from the actual ~/Documents folder after syncing to the cloud.

However, if you have an external drive at /Volumes/MYSHTUFF, you do not point iCloud at /Volumes/MYSHTUFF. You maintain a copy of ~/Documents at /Volume/MYSHTUFF/Documents. Maybe you use that as your primary work space an sync to ~/Documents periodically. For some apps and workflows (Logic projects, git repos), you don't want your live copy to be the cloud-sync'd copy.

Same with Apple Music. Keep your MP3s on an external drive, place a copy on the internal drive, drag the internal copy onto the Music app.