Probably like you, I have always heard that the 1890 census was destroyed by fire. Frankly, I never thought about the circumstances; I just knew that it would come in handy for a lot of my research if it still existed.
Seems like everyone else that I hear from, or talk to personally who is heavily involved in searching for lost relatives also believes that it was destroyed by fire.
Apparently, fire was not the cause. Speculation about fraud and other criminal acts abounded at the time.
Something else I didn't know about this census: It was the first to use punch cards that could be read electrically.
The National Archives website has a couple of pages devoted to the loss. The article was written for NARA in the Spring of 1996 by Kellee Blake and is fairly comprehensive. If you have time, click on the title link to read the article.