This song is indeed about smoking crystal meth.

"Disco" (i.e., disco stick) is sort of a term used to describe meth in her songs.

"The lights dim while we're dancing, the floor is shaking" is referring to the act of putting the flame on the pipe, but taking it off once the glass is heated enough for smoke to form. The floor is the bottom of the pipe which must rotate back and forth in order to continue letting the meth smoke up.

It's a rather obsessive song, constantly referring to the very act of smoking the meth. "The ball is turning, 300 mirrors are burning" Again, using the analogy of a disco ball, she is referring to the pipe smoking. "Through the hearts of the crowd" Referring to ingesting the smoke which affects the heart directly. "In the back hipsters banging the track" She is talking about the back of the meth pipe in which hipsters are "banging" aka hitting the pipe.

"Oh we got that disco, d-i-s-c-o and we're in heaven, feels just like heaven" Refers to the high that meth gives you.

"Line up for the dance, yeah bring those fancy pants, there's disco in the air and hair-spray everywhere" Referring to multiple people smoking in rotation. "Fancy Pants" refers to the meth pipe's shape.

A lot of the songs on The Fame have crystal meth references, with this one being a very obsessive song about the act of smoking it.