Why is my "documents" folder in the sidebar moved?

When the Desktop and Documents option of iCloud Drive is turned on, the Documents folder is moved from the Favorites section of the Finder sidebar to the iCloud section. See: Add your Desktop and Documents files to iCloud Drive - Apple Support

If "Optimize Mac Storage" is not turned on in Apple menu > System Settings > Apple ID > iCloud then there is a local copy on your Mac of all of your iCloud Drive files, including Desktop and Documents. If "Optimize Mac Storage" is turned on, there may or may not be local copies of your files depending on space available on your Mac.

The local copy is accessed via the Finder sidebar (e.g.,click on Document in the sidebar) or via the Finder "Go" menu. To determine whether or not there is a local copy, see the "View iCloud status" section of Get file, folder, and disk information on Mac - Apple Support

If you want to turn the Desktop & Document option off, see the following from Add your Desktop and Documents files to iCloud Drive - Apple Support

Turn off Desktop and Documents

1. From your Mac, choose Apple menu  > System Settings. In macOS Monterey or earlier, choose Apple menu  > System Preferences. 
2. Click Apple ID, then click iCloud.
3. Next to iCloud Drive, click Options.
4. Deselect Desktop & Documents Folders.
5. Click Done.

What happens when you turn off Desktop and Documents

When you turn off Desktop & Documents Folders, your files stay in iCloud Drive and a new Desktop and Documents folder is created on your Mac in the home folder. You can move files from iCloud Drive to your Mac as you need them, or select all of your files and drag them to the place you want to keep them.

Just turn off Desktop & Documents in iCloud Drive.

Most people choose the option to Archive their files into their home folder on their Mac because they feel safer about that.

I think that is the worst option because nothing has actually moved. No need to copy it into a new folder.

If you choose to "move" all to iCloud Drive, then copy them back to your Mac, again nothing moves. Everything is done with hard links, so the original storage on your Mac never changes. Really, both methods use the same magic, but to some it seems safer to have the Archive created.

I've seen people complain, "now I have to access my files through the iCloud (Archive) folder." Or the opposite, "now, I have access my files from iCloud." Both are true if you don't follow the rest of the directions which tells you to move them back into your Desktop and Documents folders in your Home folder.

When it first appeared, I turned it on and off to see what was going on. I understand how it works its magic, so none of it scares me, but I can see how it can totally make you crazy worrying about your data.

Yeah, what FoxFifth. (Deleted my redundant answer.)