Actually, the main event at demoscene parties have traditionally been the demo compo where the typical size limit is something like max 64 MB nowadays.
Other common events are 4k and 64k intro compos.
Here's a good example of a larger demo (Lifeforce by ASD): https://www.youtube.com/watch?v=o9GLl6kI4hQ
The size limitation is actually just one category of demoscene productions, the so called "intros", which come in 4k, 40k or 64kb variety. Demos on newer platforms can be more than 10mb in size.
The size limitation on C64 comes naturally as the disks are only able to store 170kb per side.
For example, here is a video of the "Super Larrson Brothers" demo: http://www.youtube.com/watch?v=iDMNZa8KjZ4 And here is the code itself: http://www.pouet.net/prod.php?which=51163 it's 170kb and runs on the c64.
One technique used in demos is VSP or "Variable Screen Positioning" which allows for displaying a bitmap at an arbitrary horizontal position, with wraparound, it's used by several demos including the one linked above. However, using VSP can sometimes cause a c64 to crash or lock up, and now the cause of that has been found, enabling workarounds which avoid the problem.