Creating a virtual photo booth using Twilio, WhatsApp, and Cloudinary was achieved by setting up a Twilio Function to receive images sent via WhatsApp, accessing the image URL, uploading it to Cloudinary with desired transformations, retrieving the transformed URL, and sending it back as part of a response. The setup involves creating a Twilio Function, installing the necessary dependencies, configuring Cloudinary credentials and SDK, manipulating the image using Cloudinary's transformations, and deploying the changes. With this digital photo booth, users can send pictures to receive transformed versions with various manipulations applied, such as aspect ratio adjustment, height adjustment, and overlay application.