There are no restrictions on watermark formats, but it is suggested to use.PNG images to ensure quality and transparency. However, it is good to make a distinction between the free and premium version about the size of the image.
In the free version, watermarks must have a dimension equal to the 25% of the featured product image one set in WooCommerce.
On the contrary, with the premium version, the plugin itself will resize the watermark compared to the original image. So we advise, to always have a watermark of the requested size.
This feature is available in the premium version. Using this feature, you can also choose to use an image watermark or a text watermark.