Using Itunes Match as backup
Once it is all uploaded to my iCloud and I delete it from my hard drive, will iTunes still work or will it be constantly be looking for the physical files.


After uploading all your files to iTunes Match you can delete all your local files. iTunes Match needs not the original files.


  If I can delete it, how do I upload new music I acquire, do I have to physically put it on iTunes, then upload and then delete?


You answered your question by yourself. That is the correct workflow.


  How does it work with my iPhone as I will never have the capacity to load all my songs on the phone. Is it easy to select an album or genre at a time to download to the phone?


A selection by genre is not possible. But you can select by album, artist, playlists, ... .