Move media into iTunes Library rather than Copy

https://support.apple.com/kb/PH20500?viewlocale=en_US&locale=en_US

Add items from other apps using the Automatically Add to iTunes folder. - Files put into this folder are actually moved from this folder to the correct location in the iTunes Media folder.

iTunes has two features for managing the behaviour of files added to the library, found in the advanced preferences pane. Keep organized... will move files inside the designated media folder according to their tag properties or changes to them. Copy files... will create new copies inside the media of anything that is located outside of the media folder when it is added. If this option is off then iTunes will link to the file in its original location, until such time as you choose to consolidate specific files or the whole library.

See Make a split library portable for advice on keeping all media inside the media folder in a way that reduces the chances that things will go wrong when the time comes to move your library to a new drive or computer. Apart from some limited exceptions noted there you should not move content that has been connected to an iTunes library around manually.

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My recommendation is to either make use of the Automatically Add to iTunes folder, assuming that you're happy letting iTunes organize the files, or manually place them inside the media folder where you want them, then drag the files into the iTunes interface or use File > Add Folder to Library. Leaving Copy files... enabled is generally good practice because if you do choose to drag in or play some content from a removable drive, or perhaps an email, your library will end up with a locally stored copy rather than one located somewhere it might disappear from. Consolidate your library now, then add new content in a way that means you don't ever need to do it again.

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1. Yes.
2. Note the emphasis on placing content inside the media folder before adding to library, so that iTunes isn't making unwanted copies. Only really relevant if you want manual control of the layout. Automatically Add to iTunes is generally easier. Things it doesn't like get moved to a Not Added subfolder, Hidden files may be summarily deleted rather than being added to the library.

Either way leave Copy files... enabled for when you forget to do things the right way. You'll still need to manually review the media that you currently have located outside of the iTunes media folder to decide if it has already been added, and can be discarded, or needs to be added to the library. If you're adding it you now know how to move it first to avoid duplicates.

Backup your library now, and update the backup when you've finished cleaning up.

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Moving content in and out of the Automatically Add to iTunes Media folder won't help your cause, particularly if iTunes is also trying to absorb the new content into your iCloud Music library. That takes time. Use the progress indicator at the top right of the iTunes window to see what it is up to.

If you plan to keep your media in the cloud with either iTunes Match or Apple Music then you most definitely need at least one separate physical copy of the media files or uncloudy version of library stored somewhere. It is too easy to remove an item from the iCloud Music library and then not have access to it from any device, as past threads on these boards will attest.

See also About iCloud Music Library icons and status - Apple Support. Once iTunes has stopped processing files you can try adding anything that is still shown as waiting or error using the context menu item Add to iCloud Music Library.

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The options have no effect. Files that iTunes recognizes as legitimate media files are added to the library and moved according to their metadata. Anything that cannot be handled is moved into the Not Added subfolder I mentioned before.

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With iTunes running the size of the folder should go down over time, and the size of the libraries Music folder will go up.

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