How do I create an email account with @icloud? Currently, my Apple ID is a hotmail account and I want to change my apple id to be an icloud account.

You need to use an iCloud alias that shows when you log into your hotmail account. If you create a new iCloud account, you will be creating a new Apple ID.

Note the restrictions in the article.

Apple ID Name Change. https://support.apple.com/en-us/HT202667

 What to do after you change your Apple ID or password - Apple Support     https://support.apple.com/en-us/HT204071 I suggest doing this before you change your Apple ID or password.

Based on what I have read, I suggest you leave your Apple ID email address as a 3rd party email address because you have more flexibility if you need to change the email address. For example, if the Apple ID got compromised, you can change it to another address. I also have read of many people who were locked out of their accounts when they forgot their password. Since the recovery email address is the @iCloud email address, if you forget your password, you also can't access your email to get emails from Apple to recover your account. You can set a rescue email address, but for some people, this hasn't worked.