I really wish I could use my 2TB of iCloud storage for documents, but it is just too much of a headache and I have returned to Dropbox.
Sadly all things iCloud are forever attached to your Macs internal drive and there is just no way around that.
There is no way to really manage the way documents are stored on the Mac and or in iCloud. Optimize storage setting doesn’t really help much.
Uploading is SLOW…
Even though your Finder says 1.7TB in the info bar at the bottom, it is still using your internal drive for storage.
In short, if you have enough internal drive space, iCloud is awesome. If not, Dropbox all the way.