Essentially, it's supposed to be a way of making sure that Christians are not of the "world" - that we are not "worldly." We are set apart, we are special, we are God's own for God's use.
This phenomenon can be dated back to the Reformation and the ensuing Counter-Reformation. And then back to the Church Fathers, even predating Emperor Constantine's meddling in the affairs of the church. In fact, it can be seen most prominently in the actions of the Pharisees and in their laws.
Of course, identifying each other through markers and labels is not just limited to the religious community. People groups have always found protection of one sort or another in labeling. Often the labeling is completely unnecessary (it never takes away from one group to have another group have the same rights and privileges as the first) and the categories and degrees of separation dangerous (think of the hierarchies inherent in your typical middle school or of the sub-human designation given to slaves, lower caste members, non-natives or, more specifically, black-skinned people in the US and South Africa) and therein lies the problem with such reductive measures.
In the loose affiliation that my childhood's independent Bible church belonged to, there is a list of sixteen doctrinal points that they pride themselves on and consider key to their identity, each with several sub-points. Many of the points and sub-points are, at best, of secondary or tertiary importance, un-historical (eg, Dispensationalism), or down-right divisive (cessation of the gifts of the Spirit, separationism). As if those did not cause enough division, they outright call out four "movements" as being "Contrary to Faith" - apparently meaning apostate or heretical. Among those movements are Neo-Evangelicalism (as in, Billy Graham, Christianity Today, Philip Yancey, Chuck Colson, most other Evangelicals...) and, oddly enough, NeoOrthodoxy (is that even a movement anymore?).
This type of 'holiness' (in the case of separatists like the aforementioned affiliation, they do not associate with those who associate with those they consider apostate) is not just limited to fundamentalists either. In typical evangelical fashion, we do it in our everyday mundane.
What type of church do you belong to?
Who do you read?
What kind of music do you listen to?
Are you Calvinist or Armenian?
Pentecostal or Cessationist?
Where you with the Promise Keepers?
Do you attend a megachurch?
Do you listen to such-and-such's podcasts?
How should clergy/lay leaders dress for church?
How old is the world?*
There are other questions, of course - some unasked like: Do you drink alcohol? How much/how often? Are you politically conservative or liberal? Did you really vote for ol' crazy face?
Further complicating the issue, some of these markers are synonymous with sin issues, or at the very least of being separate with "the world." A common scene when we encounter new friends is the 'beer in the fridge' syndrome. In this scenario, we try to get our toes wet in regards to finding out if they are ok with drinking. Which sounds absolutely bizarre and bewildering to anyone outside of the Evangelical fold, I know. But because of our Fundamentalist tendencies and some rather arbitrary picking and choosing, conservative evangelicals had largely shunned any sort of alcoholic drinking as if it would automatically lead to debauchery, orgies, and wife-beatings. This is considered a marker, how a pastor or sister in the Lord would know if one needed deliverance from the world. Furthermore, one shouldn't go to a bar at any time, nor play pool (up until the 1990's it was a rule at the college I worked at through college), nor smoke or play face cards (also because it was associated with gambling). These are related markers, of course, because proximity to a bottle is not enough to establish holiness but is apparently enough to drag yer alcoholics-lovin' self to hell.
Some of these identifiers can be readily and easily addressed - they're just plain legalism. Dancing, associations, alcohol consumption, music - these may affect some people in regards to their own spiritual walk, but that cannot be extended to all. Others are varied attempts at Christian acculturation. Business attire is standard wear in typical older churches on Sunday morning; one common argument being that it's less distracting than informal wear, another that we should dress up for God - as if all the time it takes preparing or buying 'non-distracting' clothes doesn't distract from trying to get in a proper mood, or as if God pays more attention to white collar people than for blue collar.
The ancient church also faced the same problems. The first gentile Christians were told that they had to accept a Jewish signifier (odd as it were, since circumcision isn't instantly identified - I would guess at least...). But the primary and first missionary to the gentiles got pretty upset at these troubled purists. In the fifth chapter of the book of Galatians, St. Paul writes:
When we place our faith in Christ Jesus, there is no benefit in being circumcised or being uncircumcised... You were running the race so well. Who has held you back from following the truth? It certainly isn’t God, for he is the one who called you to freedom. This false teaching is like a little yeast that spreads through the whole batch of dough!** I am trusting the Lord to keep you from believing false teachings... I just wish that those troublemakers who want to mutilate you by circumcision would mutilate themselves.
The Saint Paul may have a history of mixing phrases (which would confuse gentiles not as familiar with his world and theology much later in time), but never of mincing words.
The over-arching problem - I strongly suggest - is that we are choosing the wrong markers:
They will know you are Christians by your love.
From the same passage as quoted above:
So Christ has truly set us free. Now make sure that you stay free, and don’t get tied up again in slavery to the law... What is important is faith expressing itself in love...For you have been called to live in freedom, my brothers and sisters. But don’t use your freedom to satisfy your sinful nature. Instead, use your freedom to serve one another in love. For the whole law can be summed up in this one command: “Love your neighbor as yourself.”
And this, in turn, should change everything.
*A large percentage of American Evangelicals believe that it is questioning of God's creation and revealed truth that the world would be much older than 6,000 years. This is actually a modernist reading of the Bible that believes that if the bible records it, it must be literally true. But more on this phenomenon later.
** I can't be the only person somewhat amused by the massive irony that separationists quote from this verse when it's they who are yeasting up the bread, when it's they who've got the knife on the foreskin?