The cap is supported by a thin stem up to 50 mm (2.0 in) long, which is covered at the base by a whitish hairlike growth, and attached to white, cord-like rhizomorphs—aggregations of mycelium that resemble plant roots.

The underside of the cap features thin, distantly spaced grayish gills that have distinct veins running between them.

At a microscopic level, distinguishing characteristics include the inamyloid spores (turning dark blue to black when stained with Melzer's reagent), the club-shaped cheilocystidia (cystidia on the gill edges) with finger-like appendages, the diverticulate cells in the outer layer of cap and stem, and the presence of clamp connections.

It is hygrophanous (changing color as it loses or absorbs water), dry, initially pruinose (covered with what appears to be a fine white powder), but soon becomes smooth.

The hymenophoral (hymenium-bearing) tissue is made of smooth, thin-walled hyphae that are 6–26 μm wide, cylindrical (but often inflated), and contain brownish pigment in the cytoplasm.

The stem tissue is composed of longitudinally arranged, cylindrical hyphae that are 10–25 μm wide, dextrinoid, smooth, and have cytoplasmic brownish pigment.

[2] Mycena granulifera, a species originally described from Brazil, is comparable to M. nidificata in having inamyloid spores, club-shaped cheilocystidia with finger-like outgrowths, and diverticulate cap cuticle hyphae.

Mycena nidificata also bears some resemblance to the European species M. flos-nivium, which is distinguished by having cylindrical, amyloid spores, gills without veins between them, and an absence of cord-like rhizomorphs.

The mushroom is found growing solitary or scattered, on dead fallen twigs in forests dominated by the oak species Quercus castanopsis.