When you select the option to be an image it will allow you to:
- Insert an URL of the image location directly to the text area;
- Browse on your SharePoint site and pick a picture. If you click on Browse that will open a panel where you can select an image from your SharePoint libraries.
You can also upload your image for the select library by selecting the icon at the top to Upload File or by Dragging the image for the area. Note this will upload the image directly to Library that you've selected.