As it turns out, this is actually a user error.
When creating the level2.img and level3.img, you must specify the
backing store type, because libvirt won't automatically detect those for
safety reasons. So you should do:
qemu-img create -f qcow2 -o backing_fmt=qcow2 -b level1.img level2.img
qemu-img create -f qcow2 -o backing_fmt=qcow2 -b level2.img level3.img
After doing that, boot succeeds on my laptop.
** Changed in: libvirt (Ubuntu)
Status: Confirmed => Invalid
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https://bugs.launchpad.net/bugs/696318
Title:
Starting VMs on qcow2 format with base images in level three fails
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