My (limited) experience with a jian was that the tassels were easy to tie on to a small ring, and they certainly got in the way while I was doing a set. By getting in the way, I mean that they tangled around the blade, which may be more a testimony to either my lack of skill, or (possibly) to the fact that I was using a modern wushu blade. As we know, these are not designed to be fought with, and on a real weapon, it's possible that the tassels would be useful.
Nonetheless, my teacher told me that, when they dueled, they took the ornaments off, and that's an important point. He also noted that people often put tassels on things like steel whips to slow them down and make them more obvious during demonstrations.
As for the tassel catching the blood on spears...that's a story I've heard too. I'm skeptical, because spears are one of the most common weapons on the planet, and it's odd that only the Chinese were bothered with this problem. Where are the other spear tassels and blood catchers? While I am loath to criticize the masters, I want to see more than a story.
Finally, I'll point out that the Japanese reportedly tied their swords into their hands before going into battle, so that when their hands grew tired, they wouldn't drop their blades. They didn't need a big ring-hilt on their katanas to do this, either.
So where does this leave us? I'm not sure. I do know that those big rings were used to carry weapons and store them, and I do know, as Jim pointed out, that rings on dao go back a long way in history. Even the dao money had a ring on the back.
I suspect that we're looking at a feature with a number of uses.
--symbolism. The chinese ring-hilt is distinctive. Yes, there were ring swords in Europe, but I think they had actual, separate, rings attached. Rings also make a place for nice tassels, although you certainly don't need a huge ring to tie a tassel on. Still, it does say "Chinese," and that's important.
--utility: the ring is a good way to transport or store weapons. And you could tie it to your hand. Or, if you're a movie protagonist in Princess Mononoke, you put your ring hilt on your arm like a bracelet to hold your sword while you shoot your bow. Neat trick that might even work in real life
--ease of construction: This one's something Neil pointed out, but we need to think about it. This design has two nice parts. First, it's easy for a smith to work on the handle. All he has to do is to heat and straighten the ring, and he can slide handle pieces on and off easily. Second, when the smith is making the sword, he can get the balance right without adding on a pommel, just by running out the tang until the balance point is correct, then shaping the tang into a ring. As a cheap way to make a blade, that ain't bad.