This article is from the Tolkien Newsgroups FAQ, by Steuard Jensen sbjensen@midway.uchicago.edu with numerous contributions by others.
Nobody knows. Among texts considered to be at all canonical (see
question III.A.2), giants are mentioned directly only in _The Hobbit_.
This has led some to doubt their literal existence entirely, but they
do seem to have a firm place in that book: giants (and the destruction
they caused) were seen and heard by everyone, and both Thorin and
Gandalf were worried about them. Later, Gandalf says "I must see if I
can't find a more or less decent giant" to block up the goblins' new
gate (where the group was captured). He also mentions them to Beorn.
It would be difficult to reject giants without rejecting _The Hobbit_
as a canonical source entirely, which Tolkien clearly did not do. Some
believe that the voices heard by the Fellowship on the Redhorn pass
were giants, or even that Caradhras itself was a "giant" in some sense.
Three explanations for giants are relatively common. Perhaps the
most natural is that they are an exceptionally large race of humans.
Another is that they are a very large breed of troll, which could
explain why they are not seen away from the mountains: they would need
very large caves in which to hide from the sun. Finally, they could be
"nature spirits" associated with mountains (and possibly with storms);
this, too, would explain why they were only seen there. (Some
discussion of this can be found in my essay on Tom Bombadil, mentioned
in question III.B.3) There is no clear evidence for or against any of
these possibilities.
 
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