You need to specify a image hosted on a free image hosting site like
Flickr, ImageBucket etc.

An example would be http://farm1.static.flickr.com/15/19176774_a70c1b7351.jpg

We wanted to use images from the photo library initially. However if we
inserted a local image in the email, most email readers like Outlook,
Thunderbird or other web-mail readers do not display it, because this has
been, and still is a big spam issue. Currently only Apple products display
inline-images.

In the end, we compromised by referencing an image hosted on the Internet.

We are looking at hosting the pictures on your behalf and allowing you to upload from your photo gallery in a future release.