My watch doesn't have hike option. I read you change a walk to hike after snyc when done. Still no credit.
Could you post a link to an activity that you changed to hike? It is a lot easier to find issues when you look at the data.
You are correct that if you change the activity type to Hike you should get credit in the hiking challenge.
If you changed the type correctly you should see the activity in this list (which is filtered on hiking): https://connect.garmin.com/modern/activities?activityType=hiking
You can also test to leave the challenge and join again. It will take all previous activities into account: https://connect.garmin.com/modern/badge-challenge/FE46563D325C4A4D8B78779F565203C8
