How to set up time machine backup to icloud?

Backup disks you can use with Time Machine - Apple Support lists options/devices for using Time Machine states:

"Time Machine can back up certain external storage devices connected to your Mac or available on your network."

Dropbox is a separate service, and will not integrate with Time Machine.

In other words, some type of external storage device is required.

Machelp2112 wrote:

How can I set up Time Machine on my Mac to backup to Icloud? It doesn't give me that option when I choose 'back up automatically' under TM preferences.

Time Machine can only use physical drives.

You don't have the option because that method of using Time Machine is not available.